Educational guide
Reverse Mortgages, Explained Honestly
How HECM and proprietary reverse mortgages work, what they cost, and the tradeoffs to consider before you decide. No sales pitch. Just the mechanics, the math, and the parts the industry tends to gloss over.
Who reverse mortgages are for
- Age 62 or older for the FHA-insured HECM. Some proprietary (private-label) reverse mortgages allow ages as low as 55, depending on state and program.
- You own the home as your primary residence. Second homes and investment properties do not qualify for HECM.
- You continue paying property taxes, homeowners insurance, HOA dues, and home maintenance. Falling behind on any of these can put the loan into default and risk foreclosure.
- HUD-approved counseling is mandatory before you can apply for a HECM. The counselor reviews your finances, explains alternatives, and helps you decide whether the product fits.
How a reverse mortgage works
Unlike a traditional (forward) mortgage where you make monthly payments to the lender, a reverse mortgage makes payments to you, or gives you access to a line of credit, drawn against your home equity. You do not make monthly principal-and- interest payments. Interest and mortgage insurance premium (MIP) accrue on the outstanding balance over time, so the balance grows and your remaining equity shrinks.
The loan becomes due and payable when the last borrower on title permanently leaves the home. Triggering events include selling the home, moving out for more than 12 consecutive months (including a permanent move to assisted living), or the death of the last borrower. When the loan is due, your heirs have a defined window to either pay off the loan balance and keep the home, or sell the home to satisfy the loan and keep any remaining equity.
Because HECMs are non-recourse, you or your heirs can never owe more than the home is worth at the time of sale. FHA mortgage insurance covers any shortfall to the lender. This is one of the structural protections that distinguishes a HECM from a home equity loan or HELOC.
HECM vs proprietary reverse mortgages
| Factor | HECM (FHA-insured) | Proprietary / Jumbo |
|---|---|---|
| Minimum age | 62 | Often 55, varies by state |
| Lending limit | $1,249,125 national (2026) | Up to several million |
| Insurance | FHA-insured, non-recourse | Private, terms vary by lender |
| Counseling | HUD counseling required | Counseling typically required |
| Disbursement options | Lump sum, LOC, tenure, term, or combo | Typically lump sum; LOC on some programs |
| Best fit | Home values within FHA limit | Higher-value homes above HECM cap |
HECM disbursement options
You decide at closing how you want to receive your loan proceeds. Most borrowers combine options. Each has different mechanics and tradeoffs.
Option 1
Lump sum
Take the full available proceeds at closing as a single payment. Only available on the fixed-rate HECM. Interest begins accruing on the full balance immediately.
Option 2
Line of credit
Available on the adjustable-rate HECM. Draw funds when needed. The unused portion of the line grows over time at the same rate the loan accrues, so the borrowing capacity increases the longer you leave it untouched.
Option 3
Tenure payments
Fixed monthly payments for as long as at least one borrower lives in the home as their primary residence. Provides predictable lifetime income from your equity.
Option 4
Term payments
Fixed monthly payments for a specific number of months you choose. Larger monthly payments than tenure, but they stop at the end of the term.
Option 5
Combination (LOC + monthly)
Most flexible. Take some proceeds as a line of credit while also receiving monthly tenure or term payments. Lets you keep a growing emergency reserve while pulling steady income.
What a reverse mortgage costs
Reverse mortgage costs are real, and they are higher than most equity-access products. Most fees can be financed into the loan, so out-of-pocket at closing is usually small, but your loan balance starts higher because of it.
- Upfront MIP: typically 2% of the home value (capped at the HECM lending limit). Paid to FHA at closing, financed into the loan.
- Ongoing MIP: currently 0.5% per year, charged on the outstanding loan balance and accrued into the balance monthly.
- Origination fee: HUD-capped, often in the $2,500 to $6,000 range depending on home value. Maximum is currently $6,000.
- Monthly servicing fee: typically around $30 per month, added to the loan balance each month.
- Third-party closing costs: appraisal, title insurance, recording fees, counseling fee (typically $125 to $200, can be waived for low-income applicants).
- Interest: accrues monthly on the outstanding balance. Fixed-rate HECMs lock interest at closing on the lump sum; adjustable-rate HECMs use a margin over a published index.
Common myths
Myth: The bank takes your home.
False. You retain title throughout the loan. The lender holds a mortgage lien, just like on a traditional mortgage. The home is sold (by you or your heirs) only when the loan becomes due.
Myth: Your heirs lose the house.
False. Heirs have options when the loan becomes due. They can pay off the loan balance (or 95% of the appraised value, whichever is less) and keep the home, or sell the home to satisfy the loan and keep any remaining equity.
Myth: You can end up owing more than the home is worth.
False for HECM. HECMs are non-recourse loans. At sale, you or your heirs never owe more than the home is worth. FHA mortgage insurance covers any shortfall to the lender.
Myth: A reverse mortgage hurts Social Security and Medicare.
Generally false for those two specifically. Reverse mortgage proceeds are loan proceeds, not income, so Social Security and Medicare are typically unaffected. Means-tested programs like Medicaid and SSI may be affected depending on how the proceeds are held. Confirm with a benefits counselor before drawing significant proceeds.
Tradeoffs worth being honest about
- Closing costs are significant. Relative to a HELOC or cash-out refinance, reverse mortgage upfront costs are meaningfully higher because of FHA insurance, origination, and servicing.
- The balance grows over time. Because no payments are required, interest and MIP compound into the balance. Your remaining equity, and what your heirs would inherit, decreases over the life of the loan.
- No interest deduction during the loan. Because the interest is not paid as it accrues, it is generally not deductible until the loan is paid off, which may be at sale. The proceeds themselves are not taxable income, but they are also not generating a current deduction.
- Short-stay scenarios rarely work. If you plan to move within a few years, the upfront costs rarely make sense. HECMs are designed for borrowers who intend to stay in the home long-term.
- Other options may fit better. A HELOC, cash-out refinance, or downsizing may be a better tool depending on your goals, time horizon, and ability to make monthly payments. A reverse mortgage is one option, not the only one.
How it compares to alternatives
| Factor | Reverse Mortgage | HELOC | Cash-Out Refi |
|---|---|---|---|
| Monthly P&I payment | None required | Interest-only during draw, then P&I | Yes, full P&I |
| Income / employment | Financial assessment only | Yes, full underwrite | Yes, full underwrite |
| Age requirement | 62+ HECM, 55+ proprietary | None | None |
| Equity over time | Decreases (balance grows) | Stable or decreases when drawn | Decreases at closing, then increases as you pay down |
| Main tradeoff | High upfront cost, balance grows | Variable rate, payments required | Restarts amortization, payments required |
What HUD counseling covers
Counseling with a HUD-approved housing counselor is required before you can apply for a HECM. The session typically takes 60 to 90 minutes and covers:
- Your overall financial picture, including income, expenses, and goals.
- How a HECM works, including costs, disbursement options, and borrower obligations.
- Alternatives to a reverse mortgage, including HELOC, refinance, downsizing, and public-benefit programs.
- Tax and benefits implications, including potential effects on Medicaid and SSI.
The counseling fee is typically $125 to $200 and can be waived for low-income applicants. You will receive a counseling certificate that the lender must collect before processing your application.
Frequently asked questions
Can I get a reverse mortgage if I still owe money on my home?
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Yes. In fact, paying off an existing mortgage is one of the most common reasons people use a HECM. The reverse mortgage proceeds are first applied to pay off your existing mortgage at closing. Whatever is left over after the payoff, closing costs, and any required set-asides becomes available to you as a lump sum, line of credit, monthly payments, or some combination.
What happens if my spouse is not on the loan?
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If your spouse is younger than 62 and not on the loan, they may be classified as an Eligible Non-Borrowing Spouse. Under current FHA rules, an eligible non-borrowing spouse can generally remain in the home after the borrowing spouse passes away or moves out, but they cannot access additional loan proceeds and must continue meeting the occupancy, tax, insurance, and maintenance obligations. The non-borrowing spouse must be documented at closing. It is important to work through the implications carefully during counseling.
Can I buy a new home with a reverse mortgage?
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Yes. The HECM for Purchase program lets a borrower aged 62 or older buy a primary residence using a reverse mortgage. The borrower brings a down payment (often 45% to 70% of the purchase price depending on age and rates), the HECM covers the rest, and there is no monthly mortgage payment going forward. Property taxes, insurance, HOA, and maintenance are still the borrower's responsibility.
What happens if I outlive the loan?
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HECMs are non-recourse loans. That means you and your heirs can never owe more than the home is worth at the time it is sold to satisfy the loan, even if the balance has grown larger than the value. FHA mortgage insurance covers any shortfall to the lender. You also cannot be forced to leave the home as long as you continue to meet the loan terms: occupy it as your primary residence, pay property taxes and insurance, pay HOA dues if applicable, and keep up basic maintenance.
How do I qualify?
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For a HECM, you must be at least 62 years old (all borrowers on title), occupy the home as your primary residence, have sufficient equity, and complete HUD-approved counseling. Lenders also run a financial assessment to confirm you can reasonably keep up with property taxes, insurance, and maintenance. Some proprietary (non-HECM) reverse mortgages allow ages as low as 55, depending on state and program.
Does my credit score matter?
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Credit score is not used the same way it is on a traditional mortgage. There is no minimum score required by FHA for a HECM. However, lenders do conduct a financial assessment that reviews your credit history, property charge payment history, and residual income. Past late payments on mortgage, taxes, or insurance can lead to a required Life Expectancy Set-Aside (LESA), which sets aside loan proceeds to pay future property charges. So credit history matters indirectly, but the standards are different from a forward mortgage.
Are the proceeds taxable?
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Reverse mortgage proceeds are loan proceeds, not income, so they are generally not taxable. They also generally do not affect Social Security or Medicare benefits. However, they may affect needs-based programs like Medicaid or SSI depending on how the funds are held. Confirm with a tax advisor and benefits counselor before drawing significant proceeds.
Estimate your possible proceeds
Use the reverse mortgage calculator to model your principal limit and a rough breakdown of disbursement options based on your age, home value, and an illustrative expected rate. Results are estimates only and counseling is required before any HECM application.
Jennifer Kirby, NMLS# 2672337. Loan Factory Inc, NMLS# 320841. Equal Housing Opportunity. Not a commitment to lend.