What Is a Reverse Mortgage and How Does It Work?

A reverse mortgage is a loan that lets homeowners aged 62 or older borrow against their home equity without making monthly mortgage payments.

Instead of you paying the lender each month, the lender pays you, either as a lump sum, a line of credit, or fixed monthly payments. The loan balance grows over time and gets repaid when you sell the home, move out permanently, or pass away.

Reverse mortgages were designed to help retirees supplement their income using the wealth they've built in their homes. The most common type, the Home Equity Conversion Mortgage (HECM), is federally insured by the FHA and accounts for roughly 95% of all reverse mortgages issued in the U.S.

A reverse mortgage works by converting part of your home equity into cash. Here's the basic process:

You apply through an FHA-approved lender and complete mandatory HUD counseling. The lender appraises your home, and your loan amount is calculated based on three factors: your age (or your spouse's age, whichever is younger), your home's appraised value (or the HECM lending limit, whichever is less), and current interest rates.

You choose how to receive the funds:

• Lump sum - One large payment at closing (only available with a fixed rate)
• Line of credit - Draw funds as needed, with unused amounts growing over time
• Monthly payments - Fixed payments for a set period (term) or as long as you live in the home (tenure)
• Combination - Mix monthly payments with a line of credit

You don't make monthly mortgage payments. Interest and fees are added to the loan balance, which grows over time. The loan comes due when the last borrower (or eligible non-borrowing spouse) moves out, sells the home, or passes away.

Say you're 72 years old with a home worth $400,000 and no remaining mortgage balance. Based on current HECM principal limit factors, you might qualify to borrow around $200,000 to $240,000 (roughly 50-60% of home value, depending on interest rates).

If you choose a line of credit, you'd have access to those funds whenever you need them. The unused portion of your credit line actually grows over time at the same rate as the loan's interest, giving you more borrowing power the longer you wait.

If you choose tenure payments instead, you'd receive a fixed monthly check for as long as you live in the home. At a $220,000 principal limit, that might work out to around $1,100 to $1,300 per month.

When you eventually sell or move, the loan balance (original amount plus accumulated interest and fees) gets repaid from the sale proceeds. Any remaining equity belongs to you or your heirs.

There are three types of reverse mortgages, each suited to different situations:

Home Equity Conversion Mortgage (HECM)

The HECM is the most common reverse mortgage and the only type insured by the federal government through the FHA. About 95% of reverse mortgages are HECMs.

The 2026 HECM lending limit is $1,249,125, which means the maximum home value used to calculate your loan can't exceed this cap, even if your home is worth more. This limit has increased for 10 consecutive years.

HECM borrowers can choose from lump sum, line of credit, monthly payments, or a combination. Current rates run approximately 5.25% to 7.68% APR depending on whether you choose an adjustable or fixed rate.

Proprietary Reverse Mortgage (Jumbo)

Proprietary reverse mortgages are offered by private lenders and aren't federally insured. They're designed for homeowners with high-value properties that exceed the HECM limit.

Some proprietary programs allow borrowing against homes worth up to $4 million. Because there's no government backing, these loans may carry higher interest rates and fees, but they give access to significantly more equity.

Proprietary reverse mortgages also sometimes have a lower minimum age requirement (some start at 55) and may have different property type rules.

Single-Purpose Reverse Mortgage

Single-purpose reverse mortgages are the most affordable option but the most restrictive. They're offered by state and local government agencies or nonprofits.

The funds can only be used for one lender-approved purpose, typically property tax payments or home repairs. These loans generally have lower fees than HECMs or proprietary products, but they're not available everywhere and the loan amounts tend to be smaller.

To qualify for a HECM reverse mortgage, you must meet all of the following requirements:

The mandatory counseling session is designed to make sure you understand the costs, obligations, and alternatives. You can find a HUD-approved counselor by searching the HECM Counselor Roster or calling (800) 569-4287.

Credit scores don't directly determine your eligibility for a reverse mortgage, but lenders do review your financial history and willingness to pay property charges. A pattern of missed property tax or insurance payments could lead to denial.

Reverse mortgages can be a powerful tool for some retirees and a costly mistake for others. Here's an honest breakdown:

Reverse mortgages come with several layers of costs that borrowers should understand before committing:

Mortgage Insurance Premium (MIP) HECM borrowers pay a 2% upfront MIP based on the appraised home value (or the lending limit, whichever is less), plus a 0.5% annual MIP on the outstanding loan balance. This insurance protects the lender and guarantees that you'll never owe more than your home is worth.

Origination Fee Lenders can charge $2,500 or 2% of the first $200,000 of your home's value plus 1% of the amount above $200,000, whichever is greater. The fee is capped at $6,000.

Closing Costs Standard third-party costs include the appraisal ($400-$600 typically), title search, title insurance, recording fees, and other settlement charges.

Servicing Fee Some lenders charge a monthly servicing fee of up to $30 for fixed-rate loans or $35 for adjustable-rate loans.

Interest Interest accrues on the outstanding loan balance and compounds over the life of the loan. Fixed rates are currently around 7.68% APR, while adjustable rates start around 5.25%.

Many of these fees can be financed into the loan, meaning you don't pay them out of pocket. But financing them means they'll accrue interest over time, increasing your total cost.

A reverse mortgage becomes due and payable when any of these triggering events occur:

• The last surviving borrower (or eligible non-borrowing spouse) passes away
• You sell the home
• You move out of the home for more than 12 consecutive months (including moving to a care facility)
• You fail to meet loan obligations (property taxes, insurance, maintenance)

When the loan comes due, you or your heirs typically have several options:

Sell the home - The most common approach. Proceeds from the sale pay off the loan balance, and any remaining equity goes to you or your heirs. If the home sells for less than the loan balance, FHA insurance covers the difference (that's the non-recourse protection).

Refinance into a traditional mortgage - If an heir wants to keep the home, they can refinance the reverse mortgage balance into a conventional loan.

Pay off the balance - Heirs can pay the lesser of the loan balance or 95% of the current appraised value to keep the home.

Heirs generally have 30 days after receiving a due-and-payable notice to decide what to do, with extensions available up to 12 months in some cases.

A reverse mortgage isn't the only way to tap your home equity in retirement. Consider these options:

Home Equity Loan - A home equity loan gives you a lump sum with fixed monthly payments. It's typically cheaper than a reverse mortgage but requires monthly payments, which may be challenging on a fixed retirement income.

Home Equity Line of Credit (HELOC) - A HELOC works like a credit card secured by your home. You draw funds as needed during a set draw period. Interest rates are usually lower than reverse mortgages, but monthly payments are required.

Cash-Out Refinance - A cash-out refinance replaces your current mortgage with a larger one, giving you the difference in cash. This only makes sense if current rates are favorable and you can handle the monthly payments.

Downsizing - Selling your current home and buying or renting something smaller can free up a significant amount of equity without taking on debt.

Government and Community Programs - Some states and localities offer property tax deferrals, home repair grants, or utility assistance for seniors that can reduce your need to borrow.