What Is a Reverse Mortgage?

This type of loan allows some older homeowners to tap their equity. Here's how it works

Aly J. Yale,

AARP

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Published December 03, 2024

A house shaped like money with someone pulling a part of the money out

Rob Dobi

When you own a home, you build equity in the property over time — equity that you can borrow from if you’re ever in need of cash.

Home equity loans, cash-out refinances and home equity lines of credit (HELOCs) are common strategies for doing this. If you’re an older homeowner, you may have another option: a reverse mortgage. But these mortgages are complicated, carry the risk of foreclosure and are not suitable for every homeowner

What is a reverse mortgage?

A reverse mortgage is a type of loan against your house. But unlike with a traditional mortgage, you don’t make monthly payments to a lender. Instead, the lender pays you, essentially working in “reverse,” as the name suggests. Generally, you need to be 62 or older to qualify.

With a reverse mortgage, you borrow a portion of your home equity. You can choose to receive monthly payments for a set period of time ("term) or for as long as you live in the home ("tenure); a one-time lump sum; a line of credit; or a combination of these options.

Although you don’t make any payments on a reverse mortgage, interest and fees do accrue. This means that your loan balance will increase over time, since you are not making payments on the debt. You are still responsible for paying property taxes, homeowners insurance, HOA dues and assessments. You’re also responsible for keeping the property maintained.

How do you repay a reverse mortgage?

“With a reverse mortgage, the borrower doesn't have to make loan payments for as long as they live in the home and reside in the home as their primary residence,” says Lori Trawinski, director of finance and employment at the AARP Public Policy Institute. That requires living in the home at least six months out of the year.

Any origination fees or upfront costs that are rolled into the loan will accrue interest over time. However, you don’t have to repay the loan unless you sell the home, pass away or permanently move from the property, which might happen if you move to a nursing home or an assisted living facility.

In most cases, the loan balance is paid off through the sale of your home, says Jackie Boies, a senior director and reverse mortgage counselor at Money Management International, a debt counseling nonprofit. “If your home sells for more than the loan amount, any remaining equity goes to you or your heirs” when you pass.

What are the different types of reverse mortgages?

Home Equity Conversion Mortgages (HECMs), which are insured by the Federal Housing Administration (FHA), make up the majority of reverse mortgages, Trawinski says. HECMs account for approximately 95 percent of outstanding reverse mortgage loans. You or a co-borrower must be at least age 62 to qualify. You’re also required to receive counseling from a U.S. Department of Housing and Urban Development (HUD)-certified reverse mortgage counselor. During the counseling session —it typically costs around $125, which you can pay directly or roll into the loan — the counselor will explain how reverse mortgages work and review the risks and payment options to help you make an informed decision, Boies says.

HECMs offer certain protections — most notably, if your home’s value decreases or if the lender goes out of business. “The borrower or their heir will never owe more than the home is worth,” Trawinski says. “If you took all of your proceeds and tapped all the available loan proceeds, and now your house is worth less than it was the day you got the reverse mortgage, you will never owe more than what you could sell it for.” If the lender goes out of business, the insurance ensures you still receive loan payments.

There are also single-purpose reverse mortgage loans offered by states or local governments — these are often designated for paying property taxes or covering home repairs — as well as proprietary reverse mortgages with fees and terms that can vary by lender. Proprietary reverse mortgages may offer higher loan amounts, with some lenders offering loans of over $1 million, and age requirements can vary. But proceed with caution: proprietary reverse mortgages “are not insured if a lender goes out of business,” Trawinski says.

How much can you borrow with a reverse mortgage?

With a HECM, the maximum loan limit in 2025 is $1,209,750. But the amount you can actually borrow depends on your principal limit factor (PLF), the percentage of your home valuethat you can access using a HECM. The PLF is set by HUD and is based on the current interest rate and your age.

Let’s say a 62-year-old borrower with a 7.25 percent mortgage rate has a PLF of 0.301. For a home valued at $500,000, the borrower could access around $150,000. But after including closing costs, mortgage insurance and origination fees, that amount drops to $130,000.

Don't worry: you don't have to crunch the numbers yourself. A lender can do it for you, typically at no charge.

How do you qualify for a reverse mortgage?

Your eligibility for a HECM will depend on your home's value, your age and the amount of equity you have. Typically, you’ll need at least 50 percent equity to qualify, Boies says. (Your home will need to be appraised as part of the application process to confirm its value.) HECM lenders will conduct a financial assessment to examine cash flow and determine if you have the financial capability to stay current on property taxes, insurance and maintenance. You also must not be in default status on any federal debt, such as income taxes or student loans.

Are interest rates for reverse mortgages fixed or adjustable?

Most HECMs have adjustable interest rates, meaning the rate can change monthly or annually, based on economic conditions. But lenders set a "cap" that limits rate increases in a given month or year and over the life of the loan. HECMs have a 2 percent annual cap and a 5 percent lifetime cap.

Adjustable HECM interest rates include two components: the actual market interest rate plus a margin added by the lender. The margin amount is fixed for the life of the loan.

Reverse mortgage interest rates tend to be a bit higher than rates for home equity loans or home equity lines of credit.

What happens to your reverse mortgage if you pass away?

If you die, your heirs will need to pay off the loan’s balance. They’ll have six months to satisfy the debt, though they may be able to get a 90-day extension. Heirs can choose to either sell the property or purchase it for 95 percent of its appraised value.

What are the potential drawbacks of a reverse mortgage?

Reverse mortgages have a few downsides. There’s always a risk when borrowing against your home equity, since it can result in foreclosure if you don’t adhere to the loan’s terms. With reverse mortgages, avoiding foreclosure requires staying current on your property taxes, home insurance and home maintenance, and continuing to live in the home as your primary residence. In addition, a reverse mortgage eats into your home equity. As a result, it can deplete the equity that you have left to pass on to heirs.

Moreover, scams are common in the reverse mortgage industry. In just the last few years, the Consumer Financial Protection Bureau (CFPB) has taken action against at least seven reverse mortgage lenders and servicers for issues like poor communication, inadequate staffing, preventable foreclosures, and deceptive marketing and advertising practices.

The CFPB cautions older adults to look out for scams targeting veterans or involving home contractors. (A contractor may try to convince you to take out a reverse mortgage to pay for repairs or improvements to your home.) If you think you may be a victim of a reverse mortgage scam, file a complaint with the CFPB.

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Aly J. Yale is a freelance writer with extensive experience covering personal finance and real estate topics. Her work has been published by Newsweek, Money, Yahoo Finance, Fortune, Insider, US News and World Report, and Buyside from Wall Street Journal.