What Is a Reverse Mortgage?
Getting older can bring a lot of changes, some good, some a little tougher. Maybe you’ve paid off your mortgage, but now property tax bills, homeowners insurance, or medical expenses are stacking up. Or maybe you just need a little extra cash to enjoy retirement the way you deserve.
If you’re a senior homeowner wondering how to use your home equity without selling your house, a reverse mortgage might be what you’re looking for. It’s a unique type of loan designed to give you more financial freedom in retirement.
Curious if it’s right for you? Talk to a loan officer at Rate and explore your reverse mortgage options today!
Reverse Mortgage Defined & Explained
A reverse mortgage is a special type of home loan designed to give seniors, usually 62 or older, access to part of their home equity without having to sell their house. Instead of making a monthly payment like a traditional mortgage, the lender actually pays you.
This can be a huge relief if you’re living on Social Security and need some extra money to handle property taxes, medical bills, or just everyday costs. It’s a financial product meant to ease that pressure, letting older homeowners stay in their house while getting cash from the value of the home.
The most common option is the Home Equity Conversion Mortgage (HECM), insured by the Federal Housing Administration (FHA) and overseen by the U.S. Department of Housing and Urban Development (HUD).
This HECM reverse mortgage is backed by the federal government, offering consumer protection so borrowers can get the right information and avoid scams. Agencies like the Consumer Financial Protection Bureau (CFPB) also help ensure seniors have access to trusted resources before signing anything.
How Does a Reverse Mortgage Work?
A reverse mortgage isn’t as complicated as it might seem once you break it down. First, you need to be a senior homeowner, at least 62, and your home must be your primary residence. It should also be in good condition, meaning no major safety issues or needed repairs.
The amount of money you can borrow depends on a few key things: the home value, your age (more specifically, the age of the youngest borrower), the current interest rate, and the type of reverse mortgage you pick.
Lenders also do a financial assessment to check that you can afford ongoing costs like property taxes, homeowners insurance, and keeping the house in good repair.
Instead of making a monthly mortgage payment like with a traditional mortgage, you’ll receive the loan proceeds your way—either as a lump sum, a steady monthly payment, a line of credit, or a mix.
Many seniors use the cash to cover property taxes, medical expenses, or simply to add breathing room to their monthly income.
Your loan balance will increase over time as interest and fees are added, but you don’t have to pay anything back until you move out, sell the home, or the last surviving borrower passes away.
When that happens, the house is usually sold, and the proceeds are used to repay the reverse mortgage loan. Anything left over goes to you or your heirs.
What Are the Different Types of Reverse Mortgages?
Not all reverse mortgages work the same. There are different types of reverse mortgages depending on what you need.
Single-Purpose Reverse Mortgage
This is often the least expensive reverse mortgage option. It’s usually offered by a local government or nonprofit, and it’s designed for a specific need, like catching up on property taxes, fixing a leaky roof, or covering other home repairs.
It’s not as flexible as other types, but it can be a great solution if you’re just looking for help with one important cost and don’t need a large amount of money.
HECM
The HECM reverse mortgage is the most common type of reverse mortgage in the United States. It’s backed by the FHA and regulated by HUD.
It’s popular because it offers flexibility—you can choose a lump-sum payment, monthly income, a line of credit, or a combination. It’s also the only reverse mortgage insured by the federal government, which gives senior homeowners peace of mind.
Before you can apply for an HECM loan, you’re required to meet with a HUD-approved housing counselor.
This person will walk you through the details, making sure you understand the costs, fees, and how the loan will affect your home equity and financial situation. It’s an important step to ensure you’re making the best decision for your future.
Many seniors use an HECM loan to supplement their Social Security, pay off medical expenses, or create a financial plan that provides security as they age.
It’s designed to be flexible and can help older homeowners stay in their home while using their home equity to improve their quality of life.
FHA Reverse Mortgage
Since it’s backed by the U.S. Federal Government, this type of reverse mortgage comes with strong borrower protection.
The FHA’s involvement means lenders follow strict guidelines, which helps ensure seniors get fair treatment. These mortgages also often offer lower interest rates and fees compared to proprietary reverse mortgages offered by private companies.
FHA reverse mortgages can be a great choice for seniors who want a reliable, government-backed option with flexible payout choices. Just be sure to talk with a financial advisor or HUD-approved counselor before making a final decision.
Getting all the information upfront helps ensure you’re choosing the type of loan that truly fits your needs.
Proprietary Reverse Mortgages
Proprietary reverse mortgages, sometimes called jumbo reverse mortgages, are a unique type of loan designed for homeowners with high-value homes.
Unlike a HECM, this type of reverse mortgage isn’t insured by the FHA. While that means you won’t get the same federal protections, it also means there’s no borrowing limit like with HECM loans.
For older homeowners whose property value is well above average, a proprietary reverse mortgage could offer a larger payout, making it a helpful financial tool in the right situation.
Benefits of a Reverse Mortgage
Reverse mortgages offer several advantages for older adults who need additional income or help with their financial plan.
Access to Cash
A reverse mortgage loan lets you access part of your home equity as tax-free cash. This money can cover medical expenses, home improvements, or simply help with everyday costs.
Many older adults find this especially helpful when Social Security and retirement savings aren’t quite enough.
No Monthly Mortgage Payments
One of the biggest perks is that you don’t need to make a monthly mortgage payment like you would with a traditional mortgage.
The reverse mortgage balance is only repaid when you sell the house, move out, or the last surviving borrower passes away. You will still need to cover property tax, homeowners insurance, and keep your home in good repair.
Stay in Your Home
A reverse mortgage lets you stay in your primary residence while using your home equity for support. This can offer peace of mind, especially for older homeowners who want to remain in familiar surroundings as they age.
Flexible Payout Options
Reverse mortgage borrowers can choose how they receive their loan proceeds. You can get a lump-sum payment, monthly income, a line of credit, or a mix of these options.
This flexibility allows you to create a financial plan that works for your needs, whether you need cash upfront for a medical expense or a steady stream of money over time.
Non-Recourse Loan
HECM reverse mortgages are non-recourse loans, which means you or your heir will never owe more than the value of the home when it’s sold.
Even if the loan balance grows larger than your home value, neither you nor your family member will be on the hook for the difference. The FHA insurance covers that gap.
What Are the Downsides to a Reverse Mortgage?
While a reverse mortgage can be a useful tool, it’s not perfect. There are costs and risks to consider before making a decision.
Origination Fees
Lenders charge an origination fee to set up your reverse mortgage. This fee can be higher than what you’d pay for a traditional mortgage. It’s an upfront cost that reduces the amount of money you receive from your loan proceeds.
Interest Rates
Reverse mortgages often come with a higher interest rate than other financial products. The current interest rate impacts the amount of money you can borrow and how quickly your loan balance grows. Over time, this can eat into your home equity.
Extra Fees
In addition to the origination fee, reverse mortgage costs can include mortgage insurance premiums, servicing fees, and closing costs. These fees are added to your loan balance, reducing the portion of the equity available to you.
Loss of Equity
Because interest and fees are added to your balance each month, the equity in your home can decrease over time. This could leave you with less money to pass on to an heir or to cover future housing needs if you decide to sell the property.
Who Owns the Property If I Get a Reverse Mortgage?
You still own your home, just like with a traditional mortgage. The lender places a lien on the property to secure the reverse mortgage loan.
As long as you meet your obligations—paying property tax, homeowners insurance, and keeping the house in good condition—you maintain ownership and the right to live there.
When Is It Right to Use a Reverse Mortgage or HECM?
A reverse mortgage can be the right type of loan if you’re a senior homeowner who wants to improve your monthly income, pay off a medical expense, or strengthen your financial plan. It can offer financial freedom without forcing you to sell your house or move out of your home.
That said, it’s not the best deal for everyone. The costs, interest, and impact on your home equity should be carefully considered.
Meeting with a HUD-approved housing counselor or financial advisor can help you get the information you need to decide if a reverse mortgage is a good fit for your financial situation.
How Can I Qualify for a Reverse Mortgage?
A reverse mortgage can be a smart way for senior homeowners to turn home equity into cash without selling their house or taking on a monthly mortgage payment. But like any financial product, it’s important to understand the costs, benefits, and whether it fits your financial situation.
If you’re curious about how much equity you could unlock or want to explore flexible payout options, Rate’s HECM specialists can walk you through everything and help you decide if it’s the right move for you. Taking that first step could make retirement a little easier—and a lot more enjoyable.
