Reverse Mortgage Guide 2025: What It Is, How It Works, and Alternatives

A reverse mortgage is a loan that enables homeowners aged 62 or older to convert part of their home equity into cash without selling their home. Reverse mortgages can be suitable for retirees seeking additional ongoing income or simply wanting to cash out some of their home’s equity.

In this guide, we’ll explore how reverse mortgages work, eligibility requirements, pros and cons, and when they’re suitable. Notably, before proceeding, it’s crucial to seek advice from experts such as financial advisors or reverse mortgage counselors to determine if a reverse mortgage is right for you.

Table of Contents

1. What is a reverse mortgage, and how does it work? 
   1. Repayment
   2. Costs 
   3. Types
      1. 1. Home equity conversion mortgage (HECM)
      2. 2. HECM for purchase
      3. 3. Proprietary reverse mortgage
      4. 4. Single-purpose reverse mortgage
   4. Tax and insurance implications
   5. Example
2. Eligibility requirements 
   1. Borrower
   2. Property
   3. Financial
3. Pros and cons
4. Expert opinions
5. Is a reverse mortgage right for you? 
6. How to get a reverse mortgage 
7. Alternatives
   1. Home equity loan 
   2. Home equity line of credit (HELOC)
   3. Cash-out refinance
   4. Home sale-leaseback
   5. Home equity agreement 
   6. Sell your home 
8. FAQ

What is a reverse mortgage, and how does it 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.

Let’s explore the details of how a reverse mortgage works:

Repayment

With a traditional mortgage, the borrower must make monthly payments to a lender. Not only does a reverse mortgage require no monthly payments, but the lender pays the borrower. 

How payments to the borrower are made can vary based on the reverse mortgage, but the funds are commonly issued in a single lump sum or in incremental payments over time. 

Repayment is typically deferred until the borrower moves out of the home, sells it, or passes away, even when entering a nursing home. When these events occur, the mortgage balance becomes due, and the borrower or their heirs must repay the loan, usually by selling the home.

Who repays a reverse mortgage? 

Repayment can depend on the situation. 

Situation	Repayment
Homeowner sells home	Homeowner pays from the sale proceeds
Homeowner permanently moves into nursing facility (still owns home)	Homeowner pays balance in full (unless spouse remains in home and is a co-borrower on the reverse mortgage)
Homeowner passes away	Heirs pay the balance

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%

Types of reverse mortgages

There are several types of reverse mortgages. Here are the three main ones:

Reverse mortgage type	How it works
HECM	Most common type of reverse mortgage; federally insured (by FHA)
HECM for purchase	Homebuyers buy a new home and obtain a reverse mortgage in the same transaction; requires larger down payment (as much as 50%)
Jumbo (or proprietary) reverse mortgage	Homeowners convert equity to cash at higher levels than traditional reverse mortgage
Single-purpose reverse mortgage	Not insured by the federal government; offered by state and local governments or nonprofits; to be used only for a specific purpose (e.g., home renovation)

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.

2. HECM for purchase

You can also use an HECM them to buy a primary residence, known as an HECM for purchase. It allows older homeowners to buy a new primary residence using reverse mortgage funds. Like a standard HECM, it’s available only through FHA-approved lenders and limited to borrowers age 62 and older.

To use an HECM for purchase, you’ll need to contribute enough cash to cover the difference between the HECM proceeds and the home’s purchase price, plus closing costs. This option can be helpful for retirees who want to downsize or move closer to family without taking on monthly mortgage payments.

3. 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.  

4. 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. 

Tax and insurance implications

Generally, the proceeds you receive from a reverse mortgage—either in a single lump sum or on a recurring basis—are tax-free, with no effect on your Medicare or Social Security benefits. However, the interest that accrues on the mortgage is not tax-deductible, unlike a traditional mortgage.

Additionally, borrowers must maintain homeowner’s insurance and property taxes on the home by paying these from their funds since there is no monthly payment and, therefore, no escrow account on the reverse mortgage. 

Failure to make timely property tax and insurance payments could have serious negative consequences, including the lender foreclosing on the property. 

Reverse mortgage example

Suppose a 70-year-old homeowner has a home valued at $300,000 and decides to take out a reverse mortgage. The lender determines they can borrow up to 50% of the home’s value, which amounts to $150,000. 

Let’s assume the reverse mortgage loan’s annual percentage rate (APR) is 5%, including interest and fees. The accrued interest and fees are added to the monthly reverse mortgage loan balance. 

After five years, the loan balance would be approximately $192,500 due to the monthly accrued interest. If, at this point, the homeowner decides to sell the home, they would need to repay the loan balance, which includes the initial $150,000 plus the accrued interest of approximately $42,500.

In this example, the homeowner received $150,000 in cash. However, they ended up owing more money at the end of five years due to accrued interest and fees added to the loan balance over time.

What are reverse mortgage loan eligibility requirements? 

To qualify for a reverse mortgage under the HECM program—the most common type—you must meet borrower, property, and financial requirements. The requirements for other reverse mortgages may vary. 

Reverse mortgage loan eligibility requirements commonly include: 

Borrower

To be eligible for the HECM reverse mortgage program, you must:

• Be at least 62 years of age
• Occupy the home as your primary residence
• Own the property free-and-clear or have a small existing mortgage balance you can repay with the reverse mortgage proceeds
• Not be past due on any federal debt (e.g., student loans or income taxes)
• Show you can pay ongoing property-related fees on time (e.g., taxes, insurance, HOA fees, routine maintenance)

You also must participate in a consumer counseling session about the HECM mortgage. 

Property

Only homeowners with eligible property types can use the HECM reverse mortgage program. The borrower must occupy the home as their primary residence, meet FHA standards (property and flood), and be in good condition. The most common property types include:

• One-to-four-unit residential properties
• Manufactured homes
• HUD-approved condominiums

If your property isn’t in good condition, your lender will let you know what to do to get the reverse mortgage. 

Financial

The lender will verify your ability to make property-related payments on time. Plus, the lender will check your credit history and verify your assets, income, and living expenses. 

Your lender should never make unsolicited offers for reverse mortgages by phone, email, or visits; doing so could be a tell-tale sign of a scam.

Pros and cons of a reverse mortgage

While a reverse mortgage can offer flexibility for seniors, it’s essential to weigh the pros and cons carefully. Consider how it fits into your long-term financial and estate planning goals before proceeding. 

Pros

• Access to cash

  Provides a source of one-time cash or recurring cash flow for retirees without requiring them to sell their home or get a new loan.

• No payments

  With a reverse mortgage, the borrowers aren’t required to make monthly payments, freeing up cash flow.

• Flexible payment options

  Offers various disbursement options, including a single lump sum or monthly payments.

• No income tax requirements

  The cash proceeds (one-time and ongoing) from a reverse mortgage are typically free of income taxes.

• Ability to remain in the home

  Ability to remain Borrowers can continue to live in their home until they permanently move out or pass away.in the home

• Protection against market declines

  Reverse mortgages are commonly non-recourse loans, meaning borrowers won’t owe more than the home’s value. 

Cons

• Accrued interest

  Interest accumulates over time, potentially reducing the homeowner’s equity and the inheritance left for heirs.

• Fees and closing costs

  Reverse mortgages come with fees, such as application or origination fees, closing costs, and mortgage insurance premiums.

• Impact on heirs

  Upon the borrower’s death, the estate or heirs may need to repay the loan or sell the home to pay off the mortgage.

• Limited loan amount

  The amount that can be borrowed is based on factors like the borrower’s age, home value, and current interest rates.

• Risk of foreclosure

  Failure to meet ongoing obligations, like paying property taxes or maintaining homeowner’s insurance, can lead to foreclosure.

• Complexity

  Reverse mortgages can be complex financial products, requiring borrowers to understand the terms, risks, and potential implications thoroughly.

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.

Is a reverse mortgage right for you? 

Determining whether a reverse mortgage is suitable involves considering personal financial circumstances and goals. Here are some questions to ask yourself:

• Do I plan to stay in my home for the long term? Reverse mortgages are designed to allow you to stay in your home. If you plan to move soon, there may be better options than a reverse mortgage. 
• Do I have sufficient home equity? To qualify for a reverse mortgage, you must have a lot of equity in the property. You likely won’t be eligible for a reverse mortgage if you can’t meet this eligibility requirement. 
• Can I afford to pay property tax, insurance, and maintenance costs? Your lender will verify you can afford to pay these on time. You likely won’t qualify for a reverse mortgage if you can’t afford these costs. 
• Am I willing to reduce my heirs’ inheritance? A reverse mortgage lowers your home equity. You should avoid getting a reverse mortgage if you don’t want to reduce your heirs’ inheritance. 

By honestly answering these questions, borrowers can gauge whether a reverse mortgage aligns with their financial needs and objectives, helping them make an informed decision about this financial product.

Consider the reasons you need the reverse mortgage and the requirements to qualify. Then, consult a financial professional or counselor to weigh the pros and cons. 

How to get a reverse mortgage 

If you’re ready to take out a reverse mortgage, you must take several steps. Here’s what to expect once you’ve chosen a reverse mortgage company. 

1. Meet with a reverse mortgage counselor. Federal guidelines require homeowners interested in a reverse mortgage to meet with a Department of Housing and Urban Development (HUD)-approved counselor before applying. This ensures you fully understand what you agree to with a reverse mortgage. 
2. Complete the application. Once you complete counseling, you can apply for a reverse mortgage. You must provide a counseling completion certificate, copies of your most recent mortgage statement if you still owe a balance, a copy of your deed or title if you own the home, property tax bills, a copy of your homeowner’s insurance policy, bank account statements, and proof of income if you’re still working. 
3. Get an appraisal. The reverse mortgage company needs to know what your home is worth to decide how much of your equity you can withdraw. It should schedule a professional appraisal through an independent agency. You’ll pay the appraisal fee, which can cost several hundred dollars. 
4. Close the reverse mortgage. If you’re approved, the final steps are closing and disbursement. You must sign the required paperwork and tell the reverse mortgage company where to send the proceeds if you choose a lump sum payout. 

Most reverse mortgages don’t rely on credit scores for approval, but the reverse mortgage company will likely perform a hard check of your credit to ensure you have no federal tax liens or delinquent debts. You must consent to the credit check when you submit your application. 

From start to finish, the reverse mortgage process typically takes 30 to 45 days. It may take longer if you hit a snag in underwriting or delay completing the appraisal. 

Reverse mortgage alternatives

Home equity loan 

A home equity loan could be a valuable alternative to a reverse mortgage. It allows homeowners to borrow a fixed sum using their home’s equity as collateral. Unlike a reverse mortgage, which provides income, a home equity loan offers a lump-sum payment. 

The upfront cash may be attractive, but the loan must be paid back with interest over a period. The total amount repayable increases the longer it takes to pay off the loan, posing a potential financial risk. 

Home equity line of credit (HELOC)

A HELOC operates much like a credit card, offering a revolving line of credit based on the home’s value. This flexibility could make it an attractive choice over a reverse mortgage. 

However, with fluctuating interest rates and a requirement to make minimum payments, a HELOC can become a challenging financial burden over time.

Cash-out refinance

With a cash-out refinance, you can refinance your mortgage for more than you owe, and then pocket the difference. 

This choice may appeal to you if current mortgage rates are lower than when you first got your loan. One significant drawback is the need to pay closing costs, which could offset potential savings.

Home sale-leaseback

A home sale-leaseback presents an alternative wherein you sell your home and use the funds as you wish while renting back the property. 

It is attractive to those who no longer want to manage home ownership costs but want to stay in their homes. However, you will need to adjust to the reality of being a tenant in your own home.

Home equity agreement 

A home equity agreement, also known as a home equity sharing agreement or home equity investment, is a contract where you agree to share your home’s value increase with a company or an individual. 

This allows you to access some of your home’s equity without accruing debt, but you could end up owing a significant amount of money if your home appreciates. The terms of these agreements can also be complex, requiring careful understanding. 

Sell your home 

Selling your home outright can provide you with the most significant lump sum. However, it would mean leaving your home, which may not be ideal for many seniors who would prefer to age in place. 

Also, once the home is sold, the money you receive is taxable and could affect eligibility for certain benefits.

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.

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.

How can you prepare your family to inherit a home with a reverse mortgage?

You can prepare your family for inheriting a home with a reverse mortgage by having open and honest conversations about how they may be affected. Ensure your heirs understand that upon your passing, they’ll need to decide whether to keep the home by repaying the reverse mortgage balance or sell the property to satisfy the loan. 

Share information about the current reverse mortgage balance, the home’s estimated value, and any remaining equity they may inherit.

You can help your family navigate the process smoothly by organizing important documents related to the reverse mortgage ahead of time. This includes the lender’s loan agreement, statements, and contact information. 

Create a list of tasks they’ll need to complete, like notifying the lender of your passing, deciding whether to keep or sell the home, communicating with the lender about their intentions and timelines, and exploring financing options if they wish to keep the home.

What happens to a reverse mortgage if you move to a nursing home?

If you have a reverse mortgage and need to move into a nursing home, the impact on your loan depends on the length of your stay. For short stays under 12 months, your reverse mortgage continues as normal. However, if you stay for 12 months or more, you must repay the loan. 

The only exceptions are if you have a co-borrower still living in the home (in this case, your loan will go on unchanged) or if your spouse is an eligible non-borrowing spouse (they can remain in the home without paying off the loan, but they won’t get any more money from the 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.