What Is a Reverse Mortgage, and How Does It Work?

A reverse mortgage is a unique financial tool that allows seniors to convert their home equity into cash without monthly payments. Designed for those aged 62 and older, reverse mortgages can provide extra income or financial flexibility in retirement, but they also come with risks, such as accruing interest and reduced home equity. 

We’ll explain how reverse mortgages work, including key details about eligibility, repayment, and what to consider before getting one.

Table of Contents

1. How does a reverse mortgage work? 
2. What are the 3 types of reverse mortgages?
3. Pros and cons
4. Costs 
5. Expert opinions
6. Should you get a reverse mortgage?
7. FAQ

How does a reverse mortgage work? 

A reverse mortgage lets you borrow against your home’s value without requiring monthly payments. That’s different from a home equity loan, which requires you to make payments over a set term.

So how do reverse mortgages work? It typically goes like this:

1. You connect with a lender to discuss your options. It’s important to do your research and choose a top-rated lender with a strong reputation. For example, Finance of America has been in business for over 30 years, and Mutual of Omaha has been serving customers for more than a century. To explore the best options available, check out our best reverse mortgage lenders guide.
2. You complete credit counseling to ensure you understand what getting a reverse mortgage means and the potential risks.
3. You apply for a reverse mortgage and complete a home appraisal.
4. Once approved, you’ll sign the closing paperwork.

The amount of equity you can borrow depends on your age, the value of your home, and current interest rates. Generally, older borrowers with higher-value homes and lower outstanding mortgage balances can access more. 

When it comes to payouts, it depends on the lender. Some offer a lump sum deposit to your bank account; others provide monthly payments or a line of credit you can draw against as needed.

Read More

For a deeper dive into how much money you can get from a reverse mortgage, check out our guide here.

Reverse mortgage eligibility

Who can get a reverse mortgage? To qualify, you’ll generally need to:

• Meet age requirements—typically, you must be 62 years of age or older
• Own your home outright or have paid off most of the mortgage
• Use the home as a primary residence and live there full-time
• Be able to pay property taxes, homeowners insurance, HOA fees, repairs, and maintenance costs
• Not have outstanding federal debt, such as income taxes or student loans

Your home must also be in good shape and meet any other lender standards.

Reverse mortgage repayment

Reverse mortgages are repaid with interest and fees. That means the balance goes up over time. You can defer payment while you live in the home, but payment is due in full if you:

1. Sell the home
2. Make a permanent move to a nursing care facility
3. Pass away

Who pays a reverse mortgage? It depends.

If you sell the home, you’d be responsible for paying the reverse mortgage from the proceeds. If you move to a nursing care facility, it may fall to your spouse to assume repayment if you’re married and they’re listed as a co-borrower on the loan. 

If your spouse is listed as an eligible non-borrower, they wouldn’t need to pay anything while they live in the home, even if you’ve moved into a care facility. Once both of you pass away, your heirs would need to use other assets from your estate to pay off the reverse mortgage or sell the home. 

What are the 3 types of reverse mortgages?

Reverse mortgages aren’t all alike, and one may serve your needs better than another. Here’s a quick look at the types of reverse mortgages and how they work. 

1. Home equity conversion mortgage (HECM)

A home equity conversion mortgage, or HECM, is the most common type of reverse mortgage. HECMs are the only federally backed reverse mortgage; they’re offered exclusively through FHA-approved lenders. 

HECMs are limited to homeowners 62 and older who have paid off their mortgages or just have a little left to pay. The amount you can withdraw depends on:

• Your home’s appraised value
• Current interest rates
• The age of the youngest borrower on the loan

HECMs are primarily designed to give you cash to make home repairs, pay medical bills, or cover day-to-day living expenses. However, you can also use them to buy a primary residence if you have cash to pay the difference between what you get from the HECM and the sales price, plus closing costs. 

2. Proprietary reverse mortgage

Proprietary reverse mortgages are offered by private lenders and are not backed by the FHA. This type of reverse mortgage typically carries a higher interest rate than an HECM, but they could allow you to draw out more of your equity if you have a high-value home. 

The HECM program caps the amount of equity you can withdraw. For perspective, the HECM limit for 2025 is $1.2 million. Proprietary reverse mortgages don’t have that limitation so it’s possible to get a “jumbo” loan—there will just be more debt to repay down the line.  

3. Single-purpose reverse mortgage

A single-purpose reverse mortgage is the least expensive type of reverse mortgage loan. These loans, designed for lower-income homeowners, are offered through state and local governments or non-profit agencies. 

There’s one catch, however. Single-purpose reverse mortgages limit you to using the equity you withdraw for approved purposes. 

For example, you might be able to get a single-purpose reverse mortgage to replace your roof or pay back property taxes, but you couldn’t use the funds to cover medical bills or treat yourself to a vacation. 

Read More

Read our complete guide to the types of reverse mortgages for details.

Pros and cons of reverse mortgages

A reverse mortgage can be a valuable financial tool for retirees looking to supplement their income, but it also comes with risks. Understanding the benefits and drawbacks can help you determine whether it’s the right choice for your situation. Here are the most notable pros and cons to consider before moving forward.

Pros

• You can stay in your home

• You can access additional cash

• No additional monthly payment

• No taxes on loan proceeds

• You (or your heirs) won’t owe more than the home is worth

Cons

• Fees

• Loan balance grows over time

• Your family may face complications

• Interest isn’t tax-deductible until you repay the loan

• Ongoing home expenses still apply

Read More

View our resource on the 10 pros and cons of reverse mortgages for full details.

Reverse mortgage costs 

Reverse mortgages have fees and interest that add to what you owe over time. For instance, here’s what you might pay for an HECM: 

• Origination fees: Up to $6,000
• Monthly servicing fee: $30 to $35
• FHA mortgage insurance premium (MIP): 2% upfront, then 0.5% annually
• Third-party fees and closing costs: Typically 0.5% to 1% of the home’s appraised value

You’ll also need to pay for credit counseling, which can run anywhere from $100 to $200. All of that’s on top of what you’ll pay for property taxes, homeowners insurance, HOA fees, and upkeep. 

Reverse mortgages can have fixed or variable rates. Your rate depends on the age of your home, its location and condition, your age, and the amount of equity you have. Adjustable rates tend to be lower than fixed rates, and rates are similar overall to what you might pay for a home equity loan or HELOC. 

Here’s a look at reverse mortgage rates as of January 14, 2025:

Loan type	Rate range
Fixed-rate HECM	7.56% – 7.93%
Adjustable-rate HECM	6.00% – 6.75%
Fixed-rate HECM for purchase	7.56% – 7.93%
Adjustable-rate HECM for purchase	6.00% – 6.75%
Fixed-rate jumbo reverse mortgages	8.74% – 9.63%
Adjustable-rate jumbo reverse mortgages	10.32% – 10.57%

Expert opinions on reverse mortgages

Reverse mortgages are a controversial financial tool, with strong opinions on both sides. Some financial experts warn against them due to high fees, interest costs, and the potential for foreclosure, while others focus on the need for stronger consumer protections.

Suze Orman, for example, has long been vocal about her dislike of reverse mortgages. 

Live your life the way you’re meant to live it, own your home outright. Live on the income that you have from other sources. Do not use your home as a checking account.

—Suze Orman, podcast episode, “Ask Suze & KT Anything: Reverse Mortgages, Extra Mortgage Payments And Taxes.” Listen to the full episode.

Finance guru Dave Ramsey is likewise not a fan of reverse mortgages, which he sees as problematic:

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The reality is the interest rates that the reverse mortgages are calculated on are almost double what traditional interest rates are on a mortgage. The fees are more than double. When you go to close on the reverse mortgage, they get you coming, they get you going, and the foreclosure rate on reverse mortgages is tenfold.

—Dave Ramsey, The Dave Ramsey Show.

AARP doesn’t take a stance in favor of or against reverse mortgages. However, the organization advocates for more consumer protection for homeowners. 

Older homeowners worked hard to pay their mortgages. When they borrow from their home equity so they can age in place, they deserve fair treatment and protection. Protecting the home equity of vulnerable older homeowners from deceptive and unfair practices is one of AARP Foundation’s strategic priorities.

—William Alvarado Rivera, senior vice president of litigation for AARP Foundation. Read the full statement.

Should you get a reverse mortgage?

Considering the risks, costs, and expert opinions, should you get a reverse mortgage? It could make sense if you:

• Need additional retirement income
• Own your home or have almost paid off the mortgage
• Don’t plan to leave the home to your heirs

You might think twice about whether a move is possible or whether you want to ensure the home stays with the family when you pass away. In that case, you might consider reverse mortgage alternatives, such as a home equity loan or home equity line of credit (HELOC). 

Typically, a reverse mortgage would be a last recommendation to my clients to access cash. As noted, they are expensive and some of the least effective ways to access capital in your home. There are benefits as opposed to other sources (e.g., a new mortgage or HELOC) where you would not have payments, but they are rarely the best option.

The only time I would be likely to recommend this for a client is if they have poor credit where taking out a mortgage or HELOC is not an option, and they are not concerned about leaving this home to their heirs.

FAQ

How can I avoid reverse mortgage scams?

To avoid reverse mortgage scams, always be wary of offers that seem too good to be true and high-pressure sales tactics. Verify the legitimacy of lenders and advisors, and avoid unsolicited offers. Be cautious of contractors recommending reverse mortgages for home improvements or anyone suggesting a reverse mortgage to resolve foreclosure issues. 

Ensure any financial planner or relative does not misuse a power of attorney to commit fraud in your name. Consult with trusted, HUD-approved counseling agencies and familiarize yourself with common scams, such as those involving fake veteran-specific reverse mortgages

What happens if I need to temporarily move out of my home for medical treatment?

A reverse mortgage typically allows a short absence if you need to move out for medical treatment. Generally, you can be away from your home for up to 12 consecutive months for medical reasons before it affects your reverse mortgage. However, it’s crucial to inform your loan servicer and provide the necessary documentation to support your temporary relocation due to health issues.

Can I add a spouse or family member to the reverse mortgage?

Adding a spouse or family member to a reverse mortgage is possible but typically must be done at the time of the original loan agreement. If your spouse or family member wasn’t part of the initial agreement, they may not be protected by the reverse mortgage’s non-borrowing spouse provisions, which protect certain rights if the borrowing spouse passes away. 

Consult with your lender and a reverse mortgage counselor to understand the specific rules and possible implications of adding someone to your reverse mortgage.

What are my options if I’m struggling to meet the financial obligations of a reverse mortgage?

If you’re struggling with the financial obligations of a reverse mortgage, such as property taxes, insurance, and maintenance costs, it’s essential to act fast. Contact your loan servicer to discuss options, such as restructuring the loan terms, seeking financial assistance programs, or possibly arranging a deed in lieu of foreclosure if other solutions are not feasible. 

Consider consulting with a HUD-approved counselor for guidance on managing these challenges and exploring alternative solutions.

How does a reverse mortgage affect my eligibility for government assistance programs?

A reverse mortgage can affect eligibility for need-based government assistance programs such as Medicaid and Supplemental Security Income (SSI). Loan proceeds received as lump-sum or monthly payments could be counted as assets if not spent within the month they are received, which might disqualify you from receiving benefits. 

It’s important to plan how you receive and use reverse mortgage proceeds and consult with a financial advisor or attorney to understand how a reverse mortgage could affect your specific situation regarding government assistance programs.