How Does a Reverse Mortgage Work?

Think of your home equity as a savings account that grows as you make mortgage payments and your home’s value rises — that amount may be substantial, especially if you’ve owned your home for several years. A reverse mortgage is a specialty loan that lets you tap that equity without needing to make monthly payments to a lender. But it’s only an option for older adults. 

A reverse mortgage may sound like a no-brainer. But like any kind of home loan, reverse mortgages come with risks, costs, and drawbacks. Depending on your financial situation, a reverse mortgage might not be the best fit. 

We’ll cover how a reverse mortgage works, what it costs, risks to watch out for, and when to consider other types of financing. 

What is a reverse mortgage?

A reverse mortgage is a way for adults — typically, 62 years or older — to borrow against their home equity while living in their primary residence. Home equity is based on the current market value of your home minus your principal mortgage balance. 

Like a home equity loan, a reverse mortgage is secured by your home. But instead of repaying the loan monthly, as with a traditional mortgage, you don't have to repay it until you're no longer living in the home. You will need to use the home as your principal residence, keep it well-maintained, and pay your property taxes and homeowners insurance.

There are a few types of reverse mortgages, including home equity conversion mortgages, proprietary reverse mortgage loans, and single-purpose reverse mortgage loans.

How does a reverse mortgage work?

Like a home equity loan or HELOC, a reverse mortgage is secured by the equity in your home. But unlike these loan types, you don’t need to repay it right away. You’ll typically repay a reverse mortgage when you sell your home or pass away. In the latter case, your estate would sell your home and use the proceeds to repay the loan. However, you may have to repay sooner if you no longer use the home as your primary residence, fail to keep up with property taxes or insurance payments, or fail to keep the home in good condition. 

With a reverse mortgage, the lender may offer several options for receiving the money, including as a lump sum, term-based fixed monthly payments, a line of credit, or as a combination of options. 

“Most of my clients are not aware that they can combine the automatic monthly payment with a line of credit or that they can change their payout options in the future for a reasonable $20 fee,” says Todd Christensen, education manager at MoneyFit. 

The money is typically tax-free and doesn't affect Medicare or Social Security benefits. However, the loan proceeds could affect your eligibility for need-based programs such as Supplemental Security Income (SSI).

Every month, interest and fees accrue on your debt balance, and your equity decreases. It’s even possible to entirely deplete your home equity with a reverse mortgage. Most reverse mortgages, including HECMs, are non-recourse loans, meaning neither you nor your heirs can owe more than the home’s value when the loan becomes due. Some other reverse mortgage types may offer similar protections, depending on the loan terms. Check to make sure your reverse mortgage agreement includes a non-recourse clause. 

Who qualifies for a reverse mortgage?

Reverse mortgages are generally available only to homeowners aged 62 and up, although younger homeowners may be eligible for some types. For example, some private lenders offer proprietary reverse mortgages to adults as young as 55. Home equity conversion mortgages, which are federally insured, have strict age requirements and are available only to adults ages 62 and older. To qualify for a HECM, you also must:

• Live in your home as your principal residence
• Have paid off a substantial amount of your current mortgage loan (while the government doesn't specify a percentage, a lender may prefer you have roughly 50% equity or more)   
• Maintain sufficient cash reserves to pay your property taxes, insurance, and home maintenance expenses
• Attend a session with an HUD-approved housing counselor
• Not be delinquent on federal taxes or other federal debt
• Meet the requirements of a mortgage lender

Lenders also evaluate your credit history and payment history, particularly your history of on-time property tax and home insurance premium payments.

If you’re applying for a single-purpose reverse mortgage, you may need to meet additional requirements set by the state or local government agency or nonprofit issuing the loan. For example, your income may need to fall below a certain threshold, and you may need to show you’re using the funds for an approved purpose. 

Types of reverse mortgages

Home equity conversion mortgage (HECM)

The most common type of reverse mortgage, the home equity conversion mortgage, is available from FHA-approved lenders. They allow homeowners aged 62 and older who live in their primary residence to borrow against their home equity without needing to make monthly payments. Instead, interest and fees accrue, and your loan balance grows while your home equity shrinks over time. Though you aren’t required to make mortgage payments, you are required to pay mortgage insurance — along with homeowners insurance and real estate taxes. 

Proprietary reverse mortgage loans

Proprietary reverse mortgages aren’t federally guaranteed or insured. They’re issued by private lenders and typically designed for homeowners with more expensive homes. They may have higher borrowing limits and come with higher interest rates, but they’re still typically subject to state lending or banking laws. Proprietary reverse mortgages have the same repayment rules as HECMs and typically require that you pay for mortgage insurance (along with homeowners insurance and taxes).

Single-purpose reverse mortgage loans

State and local government agencies and nonprofit organizations sometimes offer low-cost, single-purpose reverse mortgage loans for specific uses, like funding home repairs, to homeowners who meet income requirements. Although terms vary by program, you generally repay a single-purpose reverse mortgage when you sell the home, move out permanently, or pass away.

“The advantages of a single-purpose reverse are substantial,” says Cody Schuiteboer, president and CEO of Best Interest Financial. “Closing costs are considerably lower, usually just a few hundred dollars compared to thousands in a HECM transaction. The mortgage insurance premiums are nil, there's no servicing fee in many cases, and interest rates are much lower since the issuing party doesn't seek to maximize profit but promote public policy goals.”

But use cases are limited, loan amounts are smaller, and they’re not available everywhere. You can use the Eldercare Locator to find options in your area. 

How much does a reverse mortgage cost?

Most costs related to a reverse mortgage vary by lender and loan type. When comparing reverse mortgage options, pay attention to the following rates and fees:

• Mortgage insurance premiums: Standard FHA-backed HECMs have the same upfront and annual mortgage insurance premiums. The upfront rate is 2% of the lower amount — your home's appraised value or the maximum lending limit, which is $1,249,125 for 2026. The annual mortgage insurance premium is 0.5% of the outstanding loan balance.
• Origination fee: Lenders commonly charge an origination fee to cover the cost of processing the loan. The amount is typically $6,000 or less.
• Closing costs: You’ll need to pay certain third-party fees, like appraisal fees, home inspection fees, title search fees, recording fees, and credit check fees, as well as taxes. You can pay these costs upfront along with the origination fee, or you can deduct some of the proceeds from your reverse mortgage. 
• Servicing fees: The lender may charge ongoing servicing fees to maintain your account, distribute your funds, and make sure you continue to meet requirements. 
• Homeowners insurance and property taxes: You’re responsible for paying homeowners insurance and property taxes, but the lender may arrange to set aside money from your loan proceeds for this purpose, depending on the terms of your contract. 
• Interest: The lender will add interest to your outstanding balance each month. Single-purpose reverse mortgages may have the lowest interest rates, while proprietary reverse mortgages tend to have the highest interest rates. Most reverse mortgages come with variable rates, but some HECMs with a lump-sum payment may offer fixed rates. The best option for you will depend on how you plan to use the money. 

Risks of reverse mortgages

It’s a good idea to talk to a housing counselor before taking out a reverse mortgage so that you understand the risks. A counseling session is required for Home Equity Conversion Mortgages, but private reverse mortgage lenders may issue a loan without such guidance. 

Some risks to be aware of include:

• Foreclosure: A reverse mortgage is secured by your home, so there’s a risk of foreclosure if you don’t keep paying your property taxes and home insurance premiums and maintain the condition of your home. 
• Depleting funds for long-term care: Four out of five 65-year-olds will require long-term care sometime during their remaining years, according to the Center for Retirement Research at Boston College. Paid care can cost tens of thousands of dollars or more per year, depending on the level of care and the type of facility, so it’s risky to deplete your home equity unless you have long-term care insurance or a family care plan. 
• Diminished inheritance: Your heirs may need to sell your home to repay the reverse mortgage, leaving them with less of an inheritance. Diminished inheritance is especially risky if you have a dependent child and will rely on your home’s value to pay for their care after your passing. 

Is a reverse mortgage a good idea?

A reverse mortgage can be a good idea under certain circumstances. For example, if you live on a fixed income and temporarily need some extra cash that won’t affect your eligibility for income-based benefits, a reverse mortgage might fit the bill. 

If single-purpose reverse mortgages are available in your area and you can qualify, it can be a low-cost way to pay for an unexpected home repair or cover a property tax increase. You can also use an HECM to finance a home improvement project. “I’ve worked with many clients who are using a reverse mortgage to finance upgrades to their homes, from main-level master suites to updated kitchens and even replacing roofs and heating systems,” Christensen says. 

On the other hand, a reverse mortgage may not be a good idea if:

• You intend to move within 5 years: Think twice before taking out an HECM if you plan to relocate. “All costs associated with an FHA-insured loan are heavily front-loaded, and this product only makes sense if the loan lasts long enough to amortize these costs,” says Schuiteboer. 
• You don’t have a handle on your budget: “I caution clients considering a reverse mortgage to pay off credit card debts incurred through overspending,” says Christensen. “If they haven’t addressed the reasons for their overspending, a reverse mortgage will not solve their debt problems.” 
• You feel pressured into a reverse mortgage: “Elder financial abuse in this niche is a serious issue,” warns Schuiteboer. Salespeople may pressure you into investing or buying insurance policies with the funds from a reverse mortgage, for example, and some contractors prey on victims of natural disasters by suggesting reverse mortgages as a way to pay for repairs, according to the Federal Trade Commission. Be on the lookout for high-pressure sales tactics. 

If any of these situations apply to you, consider reverse mortgage alternatives before applying. Options such as a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance might be the better choice.