Reverse Mortgages Explained: How They Work and the Risks

What Is a Reverse Mortgage?

A reverse mortgage is a loan available to homeowners generally age 62 and older that lets you convert part of your home equity into cash, as a lump sum, a line of credit, monthly payments, or some combination, without selling the home or making monthly loan payments while you live there. The most common version, the HECM, is insured by the Federal Housing Administration (FHA), which is part of why it comes with specific federal rules, protections, and required counseling that private reverse mortgage products may not include.

How It's Different From a Traditional Mortgage

With a traditional mortgage, you borrow money upfront and pay it down over time, your balance shrinks and your equity grows. A reverse mortgage runs the opposite direction: you receive money now, and instead of making payments, interest and fees are added to the loan balance over time, so what you owe grows while your remaining equity shrinks. The loan generally doesn't come due as long as you continue living in the home as your primary residence and meet the loan's ongoing requirements, it becomes due and payable when you move out permanently, sell the home, or pass away.

Who Qualifies?

To qualify for a HECM, you generally need to be 62 or older, own the home outright or have significant equity (commonly, existing mortgage debt needs to be low enough to be paid off using the reverse mortgage proceeds), and use the home as your primary residence, meaning you live there more than half the year, vacation homes and rental properties don't qualify. Most single-family homes, two-to-four unit properties (if you live in one unit), and FHA-approved condominiums are eligible. Lenders also run a financial assessment to confirm you can keep up with ongoing property taxes, homeowners insurance, and, if applicable, HOA dues, since falling behind on these can put the loan in default. And every HECM borrower is required to complete a counseling session with a HUD-approved counselor before moving forward, this isn't optional paperwork, it's meant to make sure you genuinely understand the loan before committing.

How Much Can You Actually Borrow?

The amount available depends primarily on three factors: the age of the youngest borrower (or eligible non-borrowing spouse, older borrowers generally qualify for more, since the loan is expected to be outstanding for a shorter time), the lesser of your home's appraised value or the current HUD lending limit ($1,249,125 for 2026, adjusted periodically), and the interest rate in effect at the time you apply. Because older age and lower rates both generally increase the available amount, the specific number is genuinely individual, a HUD counselor or lender can walk through your specific estimate.

What Does a Reverse Mortgage Cost?

Reverse mortgages carry real upfront costs, which is one of the most commonly underestimated parts of the decision. These typically include an origination fee (federally capped at 2% of the first $200,000 of your home's value plus 1% of any amount above that, with a floor around $2,500 and a ceiling around $6,000), an upfront mortgage insurance premium, appraisal and closing costs, and ongoing costs like a smaller annual mortgage insurance premium and loan servicing fees. Most of these costs can be financed into the loan itself, meaning you don't need to pay them out of pocket at closing, but that convenience has a real tradeoff: financed costs accrue interest for the life of the loan, quietly reducing your remaining equity over time.

The Loan Balance Grows, and Your Equity Shrinks

This is the single most important thing to understand before signing: because interest and fees are added to the balance instead of being paid down monthly, the amount you owe grows larger every year you have the loan, and the equity remaining in your home (what's left for you or your heirs) generally shrinks correspondingly. In a market where home values are rising or stable, there's often still meaningful equity left; in a market where values stagnate or fall, it's possible for the loan balance to eventually approach or exceed the home's value. HECMs include a federal guarantee that you (or your heirs) will never owe more than the home is worth at the time it's sold, called a non-recourse feature, but that protection means the lender absorbs the shortfall, not that there will necessarily be equity left over for you.

Ongoing Requirements You Must Keep Up

Taking out the loan isn't the end of your obligations. You must continue living in the home as your primary residence, keep paying property taxes and homeowners insurance, and maintain the property in reasonable condition. Falling behind on any of these can put the loan into default, potentially leading to foreclosure, even though you're not making a traditional monthly mortgage payment. This is a genuinely important risk to plan around, particularly if your income might tighten in the years ahead.

What Happens If You Move or Need Long-Term Care?

If you move out of the home permanently, including a move into assisted living or a nursing home beyond a certain length of time, the loan generally becomes due and payable, typically requiring the home to be sold or the balance otherwise paid off. This is worth thinking through carefully if there's a reasonable chance you might need to relocate for care in the coming years, since it directly affects when the loan comes due.

Protections for a Non-Borrowing Spouse

If only one spouse is listed as the borrower on the reverse mortgage and that spouse passes away or moves to a care facility, federal rules provide certain protections that can allow an eligible non-borrowing spouse to remain in the home without the loan immediately becoming due, provided specific requirements are met (generally including that the surviving spouse was married to the borrower at closing, is named in the loan documents, and continues meeting occupancy and property-charge obligations). These protections are meaningful but fact-specific and not automatic, if both spouses are eligible, it's generally worth exploring whether both can be listed as co-borrowers rather than relying on non-borrowing spouse protections after the fact. Discuss this specifically with your HUD counselor and lender before closing.

What This Means for Your Heirs

When the borrower passes away, the loan becomes due, and heirs are typically given a window of time, though tight, to decide how to handle it: pay off the loan balance (often by selling the home) and keep any remaining equity, or, if the balance exceeds the home's value, sell the home to satisfy the loan without owing the difference thanks to the non-recourse protection. Heirs have reported real frustration with loan servicer red tape and slow paperwork during this process, so if you're taking out a reverse mortgage, it's worth having a direct conversation with your heirs in advance about the loan, the paperwork they'll eventually need, and realistic expectations about what, if anything, will be left.

Watch for High-Pressure Sales Tactics

Reverse mortgages have historically attracted aggressive marketing, including seminars and advertising that frame them as risk-free or ideal for everyone, while downplaying the real costs and tradeoffs. Federal rules prohibit misleading advertising specifically for HECM products, but that doesn't eliminate every high-pressure pitch in the market. A genuinely trustworthy lender or counselor won't rush you, pressure you to use the proceeds for a specific investment or purchase, or discourage you from involving your family or an independent advisor.

Alternatives Worth Considering First

Before committing to a reverse mortgage, it's worth comparing it against other ways to access money in retirement: downsizing to a smaller, less expensive home and investing the proceeds, a home equity loan or line of credit (though these do require monthly payments, unlike a reverse mortgage), tapping retirement accounts according to your broader financial plan, or, for smaller needs, local property tax deferral or senior assistance programs that don't involve borrowing against the home at all. Which option fits best depends heavily on your specific goals, whether you plan to stay in the home long-term, and what you want to leave to heirs, exactly the kind of question worth bringing to a fee-only financial advisor alongside your required HUD counseling session.

Frequently Asked Questions