A reverse mortgage is a type of loan available to eligible homeowners, usually 62 and older, who own their primary residence outright or have significant home equity (typically 50% or more of the home’s value). It allows borrowers to convert part of their equity to cash without moving or selling their home.
Homeowners who opt for a reverse mortgage don’t make monthly mortgage payments. Instead, as the loan’s name suggests, the payment flows in reverse, with the lender paying funds to the borrower instead of the other way around. The homeowner is only responsible for upkeep of the home and paying:
- Property taxes
- Homeowners insurance premiums
- Mortgage insurance premiums
- Homeowners association fees
- Maintenance expenses
- Loan servicing fee
That said, reverse mortgage payments aren’t free money. The loan balance, which includes interest and fees, grows monthly, increasing the borrower’s debt. At the same time, home equity decreases.
When the homeowner sells the property, or the owner’s heirs sell the home after the owner passes away, the proceeds from the sale cover the remainder of the reverse mortgage balance. If the home sells above the loan balance, the borrower or heirs receive the excess money from the sale.
How Do You Receive Payments on a Reverse Mortgage?
As long as the eligible borrower or co-borrower uses the home as their primary residence, reverse mortgage borrowers can choose from various distribution options to receive their cash:
- Single lump sum payment
- Regular fixed monthly payments for a specified term
- Tenure plan of uniform monthly payments for as long as the eligible borrower or co-borrowers live in the home
- Line of credit to draw from as needed
- A hybrid or modified plan of monthly payments and line of credit
4 Types of Reverse Mortgages
There are several types of reverse mortgages designed for specific circumstances. Each option also comes with different lending criteria.
1. Home Equity Conversion Mortgage (HECM)
HECMs, the most common type of reverse mortgage loan, are insured by the FHA. To qualify, you’ll need to meet with a HUD-approved HECM counselor in person or over the phone. The maximum amount you can borrow will depend on your age, the interest rate, the value of your home and the HECM borrowing cap. The 2024 borrowing cap for a HECM loan is $1,149,825.
HECMs are non-recourse loans, meaning if the borrower or heirs default, the lender cannot seize other assets to pay off the remaining loan balance. If the loan balance surpasses the home’s value, heirs can only pay up to 95% of the appraised value; mortgage insurance covers the rest.
2. HECM for Purchase
This type of HECM is for borrowers looking to purchase a new primary residence using equity from their previous home, savings or other assets. The loan requires the borrower to make a sizable down payment (typically around 50%) and cover closing costs. The reverse mortgage finances the remaining balance.
Older borrowers looking to downsize, improve cash flow or relocate closer to family often get this mortgage. HECMs for Purchase are governed by the same obligations as standard HECMs, and the home must meet FHA property standards and flood requirements.
3. Single-Purpose Reverse Mortgage
This more restrictive type of reverse mortgage is distributed as a lump sum payment that borrowers 62 and older can use for a single, lender-approved purpose such as home repairs or property tax payments.
Less common than HECMs, single-purpose reverse mortgages are tax-free and offered by state and local government agencies as well as non-profit organizations. They are also usually the least expensive reverse mortgage option, making them a practical choice for low- to moderate-income borrowers.
4. Proprietary Reverse Mortgage
Also referred to as jumbo reverse mortgages, these loans are not federally backed and are less strict than HECMs. Some examples, such as Longbridge Financial’s Platinum Mortgage, allow you to borrow more cash (up to $4 million in some cases) than a standard reverse mortgage.
This loan type is suitable for eligible borrowers who own high-value properties that exceed the FHA limit and are also seeking to access cash beyond the federally insured loan limits. Age requirements for this loan type vary by lender, but many lenders accept a minimum age of 55.
Reverse Mortgage vs. Conventional Mortgage
A conventional mortgage is the most common type of traditional mortgage. Reverse mortgages resemble traditional mortgages, or “forward” mortgages, in several ways. For example, your existing home is used as collateral with both a traditional and reverse mortgage. Additionally, you retain the title of your home with both mortgages.
However, there are also distinct differences between their structure and requirements.
| Loan Conditions | Traditional Mortgage | Reverse Mortgage |
|---|---|---|
| Home is used as collateral for the loan | Yes | Yes |
| Borrower is required to make monthly mortgage payments | Yes | No |
| Borrower is required to pay monthly property taxes and homeowners insurance premiums | Yes | Yes |
| Lender pays borrower a lump sum or line of credit | No | Yes |
| Loan balance decreases over the life of the loan | Yes | No |
| Age restrictions apply | No | Yes |
| Borrower retains title of home and homeownership | Yes | Yes |
| Borrower is required to keep home in good condition | No | Yes |
| Borrower may need to pay lender more than the home value at the time of sale | Yes | In some instances |
| Mortgage interest is tax-deductible | Yes | Only after the loan balance is repaid |
Pros and Cons of Reverse Mortgages
Like any home loan, reverse mortgages have their advantages and drawbacks. Here are the most notable ones.
| Pros | Cons |
|---|---|
| Provides cash flow with few restrictions allowing for greater flexibility during retirement years | Often comes with a higher interest rate and fees compared to a traditional mortgage or home equity loan |
| Reverse mortgage loan proceeds are not typically subject to taxes and do not impact Medicare or Social Security benefits | HUD-approved housing counselor required for borrowers interested in a HECM |
| Allows older adults to remain in their home | Borrowers are required to maintain the home and use it as their primary residence |
| No prepayment penalty | Complex terms, conditions and risks |
| Borrowers or heirs can keep excess proceeds if the home value is higher than the loan balance at the time of sale | Significantly reduces home equity gains and potentially reduces inheritance for heirs |
| Surviving, non-borrowing spouse typically has the option to remain in the home with conditions | Some borrowers could outlive the loan’s proceeds |
Is a Reverse Mortgage Right For You?
For older homeowners with substantial home equity, a reverse mortgage may be a viable option to access long-term liquidity or one-off funds for a specific purpose.
However, reverse mortgages are complex loan products that are not one-size-fits-all and come with risks and challenges.
Before committing, evaluate your reasons for choosing a reverse mortgage over the other ways to access your home equity and determine if the benefits outweigh the risks and higher costs. Seeking advice from an expert, such as a HUD-approved counselor or a certified reverse mortgage professional, can also provide valuable guidance.