Reverse Mortgages

Three types of reverse mortgages are available: (1) a single-purpose reverse mortgage, offered by some state and local government agencies and nonprofit organizations; (2) a federally insured reverse mortgage, known as a Home Equity Conversion Mortgage (HECM) and backed by the U. S. Department of Housing and Urban Development  (opens new window)(HUD); and (3) a proprietary reverse mortgage, which is a private loan backed by the mortgage company or lender offering it.

Single-purpose reverse mortgages are the least expensive option. They are not available everywhere and can be used for only one purpose, which is specified by the government or nonprofit lender. For example, the lender might say the loan may be used only to pay for home repairs, improvements, or property taxes. Most homeowners with low or moderate income can qualify for these loans.

HECMs and proprietary reverse mortgages may be more expensive than traditional home loans, and the upfront costs can be high. That’s important to consider, especially if you plan to stay in your home for just a short time or borrow a small amount. HECM loans are widely available, have no income or medical requirements, and can be used for any purpose.

Before applying for a HECM, you must meet with a counselor from an independent government-approved housing counseling agency. Some lenders offering proprietary reverse mortgages also require counseling. The counselor is required to explain the loan’s costs and financial implications, and possible alternatives to help you compare choices.

You can visit the HUD Exchange to find a housing counselor in your area, or call the agency at 1-800-569-4287.

If you’re 62 years of age or older – and looking for money to finance a home improvement, pay off your current mortgage, supplement your retirement income, or pay for healthcare expenses – you may be eligible for a reverse mortgage. Generally, you must own your home outright or have a low mortgage balance that can be paid off with proceeds from the reverse mortgage. You must have the financial resources to pay ongoing property taxes and insurance, and you must live in the home.

The amount you can borrow with a reverse mortgage depends on several factors, including your age, the type of reverse mortgage you select, the appraised value of your home, and current interest rates. You may be able to choose among several payment options, such as a single lump sum disbursement, fixed monthly cash advances for a specified time frame, a line of credit that lets you draw down the loan proceeds at any time in amounts you choose, or a combination of monthly payments and a line of credit.

You can locate an FHA-approved reverse mortgage lender by using the HUD Lender List Search tool. This tool allows you to search for lenders in your area using various selection criteria. An FHA loan is a mortgage insured by the Federal Housing Administration.  

If you’re considering a reverse mortgage, shop around. Compare your options and the terms various lenders offer. Learn as much as you can about reverse mortgages before you talk to a counselor or lender.

Be wary of sales pitches. Some companies may offer you goods or services, like home improvement services, and then suggest that a reverse mortgage would be an easy way to pay for them. Lenders who offer reverse mortgages may pressure you to buy other financial products, like an annuity or long-term care insurance.

You don’t have to buy any products or services to get a reverse mortgage (except to maintain the adequate homeowners or hazard insurance that HUD and other lenders require). In some situations, it’s illegal to require you to buy other products to get a reverse mortgage.

Bottom line: If you don’t understand the cost or features of a reverse mortgage or any other product offered to you – or if there is pressure or urgency to complete the transaction – walk away and take your business elsewhere. Consider seeking the advice of a family member, friend, or someone else you trust.

Reverse mortgage loan advances are not taxable, and generally don’t affect your Social Security or Medicare benefits. You retain the title to your home, and you don’t have to make monthly repayments. The loan doesn’t have to be repaid until the last surviving borrower dies, you sell the home, or you no longer live in the home as a principal residence.

Lenders generally charge an origination fee, a mortgage insurance premium (for federally insured HECMs), and other closing costs for a reverse mortgage. Lenders also may charge servicing fees during the term of the mortgage. 

The amount you owe on a reverse mortgage grows over time. Interest is charged on the outstanding balance and added to the amount you owe each month. That means your total debt increases as the loan funds are advanced to you and interest on the loan accrues.

Because you retain title to your home, you are responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. If you don’t pay property taxes, carry homeowner’s insurance, or maintain the condition of your home, your loan may become due and payable.

Any interest accrued on a reverse mortgage is not deductible on your income tax return until the loan is paid in full. 

Reverse mortgages can use up all or some of the equity in your home, and leave fewer assets for you and your heirs. Most reverse mortgages have a “nonrecourse” clause, which prevents you or your estate from owing more than the value of your home when the loan becomes due and the home is sold. However, if you or your heirs want to retain ownership of the home, you usually must repay the loan in full – even if the loan balance is greater than the value of the home.

Under federal law, you have three calendar days to change your mind and cancel the loan. The process of canceling the loan should be explained at closing. Be sure to ask the lender for clear instructions on this process, including the contact information of the people involved in the process.

For more information, visit:

The Federal Trade Commission (FTC)

Consumer Financial Protection Bureau (CFPB)

U.S. Department of Housing and Urban Development (HUD)

Reverse Mortgage Spotlight (AARP)