How does a reverse mortgage work?

How does a reverse mortgage work? It lets homeowners 62 and older borrow against their home equity without selling or making monthly mortgage payments. The title stays in your name. Interest and fees are added to the balance each month, so it grows, and the loan is usually repaid by selling the home after you move out or die.

What is a reverse mortgage?

A reverse mortgage is a home loan that lets older homeowners borrow against the equity they've built up, without selling the house or making a monthly mortgage payment. The most common kind is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA) and is only for homeowners 62 and older (CFPB). This guide explains how a HECM works. Private, non-FHA reverse mortgages exist too, mainly for higher-value homes, and their rules vary by lender.

Like a regular mortgage, a reverse mortgage uses your home as security, and the title stays in your name. The difference is which way the money flows. With a regular mortgage you pay the lender every month and your balance shrinks. With a reverse mortgage the lender pays you, and your balance grows.

How a reverse mortgage works, step by step

1. You check whether you qualify

For a HECM, the youngest borrower must be 62 or older, the home must be your principal residence, and you need enough equity for the loan to pay off any existing mortgage. The lender also runs a financial assessment to see whether you can keep paying property taxes and insurance. The full checklist is in reverse mortgage requirements.

2. You meet with a HUD-approved counselor

Counseling is required before you apply. An independent counselor walks you through the costs, the alternatives, and what happens to the home later. Find one at hud.gov/counseling or call (800) 569-4287, and see what to expect in counseling.

3. The lender works out how much you can borrow

You can't borrow your home's full value. FHA sets a "principal limit" based mainly on the youngest borrower's age, expected interest rates, and the home's appraised value, counted only up to $1,249,125 (valid through Dec 31, 2026; HUD). Any existing mortgage and the upfront costs come out of that amount first. In the first year you can usually take only part of the principal limit; HUD sets the exact share by notice (24 CFR 206.25(a)), currently 60%, or more if needed to pay off your current mortgage and other required costs (HUD Mortgagee Letter 2013-27). See how much can I get? for the details.

4. You choose how to receive the money

HUD rules offer several payment options (24 CFR 206.19):

• Line of credit. You draw money when you need it, in the amounts you choose. Interest is charged only on what you've drawn, and the unused part of the line grows over time.
• Tenure payments. Equal monthly payments for as long as a borrower lives in the home and meets the loan terms.
• Term payments. Equal monthly payments for a fixed number of months that you choose.
• A mix. Monthly payments (term or tenure) combined with a line of credit.
• Single lump sum. One payment at closing. This is the only option on a fixed-rate HECM.

5. You close, and you can still change your mind

With most reverse mortgages you can cancel in writing within three business days after closing, for any reason and without penalty (CFPB). That right doesn't apply to a reverse mortgage used to buy a home (12 CFR 1026.23(f)(1)).

6. You live in the home and keep up your end

You don't owe a monthly mortgage payment, but you do have to keep living in the home as your principal residence, pay property taxes and homeowners insurance (and flood insurance if required), pay any HOA dues, and keep the home in good repair. You can make voluntary payments any time to slow the balance's growth, with no prepayment penalty.

Why does a reverse mortgage balance grow?

Each month, interest and FHA mortgage insurance are added to what you owe. Because they're charged on a balance that keeps getting bigger, the loan grows faster as the years go by. The Consumer Financial Protection Bureau warns that a reverse mortgage "is not free money," and borrowed money plus interest plus fees each month equals a rising loan balance. The costs include an upfront FHA mortgage insurance premium of 2% of the home's value (up to the limit), 0.5% a year in ongoing mortgage insurance, an origination fee capped at $6,000, and regular closing costs. Reverse mortgage costs explained breaks each one down.

When does a reverse mortgage have to be repaid?

Under HUD rules, a HECM becomes due and payable when (24 CFR 206.27):

• the last surviving borrower dies, or sells or gives away the home;
• the home stops being the principal residence of at least one borrower;
• no borrower has lived there for more than 12 months in a row because of physical or mental illness, such as a long stay in a nursing home;
• property taxes or insurance aren't paid, or another loan term isn't met, such as keeping the home in repair.

An eligible non-borrowing spouse may be able to stay in the home after the borrower dies, as long as certain conditions are met. If the loan comes due because of missed taxes or insurance, the home can go into foreclosure, so read can you lose your home with a reverse mortgage? before you sign.

What happens to the house and your heirs?

When the loan comes due, the home is usually sold and the loan is paid from the sale. If the house sells for more than the balance, the rest goes to you or your estate. Heirs who want to keep the home can pay off the loan, and HUD's program lets them do it for the lesser of the loan balance or 95% of the home's appraised value (24 CFR 206.125(c) and HUD guidance in HUD Handbook 4000.1).

A HECM is also a "non-recourse" loan. You have no personal liability for the balance, the lender can collect only through the sale of the home, and it can't get a deficiency judgment against you if the loan is foreclosed (24 CFR 206.27(b)(8)). In other words, neither you nor your heirs will owe more than the home is worth. Families often have more questions here; see what happens to a reverse mortgage when the borrower dies.

A simple example

This is a made-up illustration, not a quote. Say a 74-year-old homeowner has a house worth about $400,000 and still owes $60,000 on a regular mortgage. At closing, part of the reverse mortgage pays off that $60,000, so the monthly mortgage payment goes away. The upfront costs are added to the loan, and whatever is left becomes available, for example as a line of credit to draw on for home repairs or medical bills. Over the years, interest and mortgage insurance raise the balance. When she eventually sells and moves, the sale pays off the loan, and what remains is hers. To see a rough range for your own home, use the estimator on this page.

Is a reverse mortgage a good idea?

It depends on your goals. It can help if you want to stay in your home, have most of your wealth tied up in it, and want to stop a monthly mortgage payment or build a cash cushion. It's usually a poor fit if you plan to move within a few years, can't keep up with taxes and insurance, or want to leave the house free and clear to your heirs. The CFPB also warns about contractors who push reverse mortgages to pay for repairs, and about ads falsely promising veterans special deals; the VA doesn't offer reverse mortgages. Weigh both sides in reverse mortgage pros and cons, and compare a HELOC, home equity loan, or downsizing. Thinking of moving? A HECM for Purchase can buy a new home.

Frequently asked questions