Many older Americans have much of their wealth tied up in their homes. A reverse mortgage offers a way to tap that equity while continuing to live in the house. The most common type is the Home Equity Conversion Mortgage (HECM), insured by the Federal Housing Administration. A HECM can provide income, a lump sum, or a growing line of credit, but it is a complex product with real costs and obligations. This guide explains how an HECM reverse mortgage works so you and your family can decide whether it fits your plans.
What Is a Reverse Mortgage?
With a traditional mortgage, you make monthly payments to a lender and your loan balance falls over time. With a reverse mortgage, the lender pays you, or makes funds available to you, and you are not required to make monthly principal and interest payments. Interest and fees are added to the loan balance, so the balance grows over time while your equity typically shrinks.
The loan generally becomes due when the last surviving borrower dies, sells the home, or no longer lives in it as a principal residence, including moving out for more than 12 consecutive months, for example to a care facility. It can also become due if you fail to meet loan obligations, such as paying property taxes and insurance.
HECM Eligibility Requirements
Borrower Requirements
- At least one borrower must be 62 or older.
- You must own the home outright or have substantial equity, since any existing mortgage must be paid off with HECM proceeds at closing.
- You must live in the home as your principal residence.
- You cannot be delinquent on federal debt, such as federal income taxes or federal student loans.
- You must complete counseling with a HUD-approved HECM counselor before applying.
- You must pass a financial assessment showing you can keep paying property taxes, insurance, and maintenance.
Property Requirements
Eligible properties include single-family homes, two- to four-unit homes where you live in one unit, FHA-approved condominiums, and certain manufactured homes that meet FHA standards. The property must meet FHA minimum property standards; required repairs may be completed before closing or funded through a set-aside.
Mandatory HECM Counseling
Before you can apply, you must meet with an independent counselor approved by HUD. The session covers how the loan works, costs, alternatives, and the impact on your heirs and public benefits. Counseling is typically available by phone or in person. Fees vary, and some agencies waive them for people with limited means. You can find a counselor through HUD’s website or by calling the HUD housing counseling line.
How Much Can You Borrow?
The amount available, called the principal limit, depends on:
- The age of the youngest borrower or eligible non-borrowing spouse
- Current expected interest rates
- The lesser of your home’s appraised value, sale price for HECM for Purchase, or the FHA maximum claim amount
The FHA sets a national maximum claim amount each year, which is above $1 million. Older borrowers and lower interest rates generally produce higher principal limits. In the first 12 months, you can typically access only up to 60% of the principal limit, or more if needed to pay off an existing mortgage and other mandatory obligations, which is designed to protect borrowers from depleting funds too quickly.
HECM Payout Options
| Option | How it works | Rate type |
|---|---|---|
| Lump sum | One payment at closing | Fixed rate only |
| Tenure | Equal monthly payments for as long as you live in the home | Adjustable |
| Term | Equal monthly payments for a set number of years | Adjustable |
| Line of credit | Draw funds as needed | Adjustable |
| Combination | Mix of monthly payments and a line of credit | Adjustable |
The Growing Line of Credit
A notable feature of the HECM line of credit is that the unused portion grows over time at the same rate as the loan balance, which includes interest and the annual mortgage insurance rate. This means available credit can increase even if you do not draw. Some retirees open a line of credit early as a financial safety net.
Costs of a HECM Reverse Mortgage
Reverse mortgages can be expensive upfront. Typical costs include:
- Initial mortgage insurance premium: 2% of the maximum claim amount.
- Annual mortgage insurance premium: 0.5% of the outstanding loan balance, added to the balance.
- Origination fee: capped by FHA rules; the cap is the greater of $2,500 or 2% of the first $200,000 of home value plus 1% above that, with a total maximum of $6,000.
- Third-party closing costs: appraisal, title, recording, and other fees.
- Servicing fees: some lenders charge a monthly servicing fee, while others build it into the rate.
- Interest: charged on the growing balance.
Most of these can be financed into the loan, which reduces your available funds but lowers upfront cash.
Your Obligations as a Borrower
A reverse mortgage does not eliminate homeownership costs. You must:
- Pay property taxes on time
- Keep homeowners insurance, and flood insurance if required
- Pay HOA dues if applicable
- Maintain the home in good condition
- Live in the home as your principal residence
Failure to meet these obligations can result in default and foreclosure. If the financial assessment shows risk, the lender may require a Life Expectancy Set-Aside (LESA), which reserves part of your proceeds to pay taxes and insurance.
Non-Recourse Protection
HECMs are non-recourse loans. You or your heirs will never owe more than the home is worth when the loan is repaid. If the balance exceeds the home’s value, FHA insurance covers the difference. When heirs want to keep the home, they can generally pay off the loan for the lesser of the balance or 95% of the current appraised value.
Protections for Spouses
If only one spouse is a borrower, an eligible non-borrowing spouse may be able to remain in the home after the borrowing spouse dies, provided certain conditions are met, including being named in the loan documents and continuing to meet loan obligations. However, the non-borrowing spouse cannot receive additional loan funds. Couples should understand these rules fully during counseling, and many choose to have both spouses on the loan if both are 62 or older.
Effects on Benefits and Taxes
Reverse mortgage proceeds are generally considered loan proceeds, not income, so they are typically not taxable and do not affect Social Security retirement or Medicare benefits. However, money you hold in the bank could count as assets for means-tested programs like Medicaid or Supplemental Security Income if not spent in the month received. Interest is generally not deductible until it is actually paid, usually when the loan is repaid. Talk with a benefits counselor or tax professional.
Pros and Cons
Pros:
- No required monthly mortgage payments
- Stay in your home while accessing equity
- Flexible payout options, including a growing credit line
- Non-recourse protection for you and your heirs
Cons:
- High upfront costs compared with other options
- Loan balance grows, reducing what you leave to heirs
- Ongoing tax, insurance, and maintenance obligations
- Complexity that can be confusing for borrowers and families
Alternatives to Consider
Before committing, compare a HECM with downsizing, a home equity loan or HELOC if you can make payments, state or local property tax deferral programs for seniors, renting out part of the home, or help from family. Counselors can walk you through these alternatives.
Avoiding Reverse Mortgage Scams
Be wary of anyone who pressures you to take a reverse mortgage to buy an annuity or other investment, offers a “free” home, or contacts you unsolicited. Be cautious of contractors who suggest a reverse mortgage to pay for repairs. Work only with lenders approved by FHA, and verify loan officers through NMLS Consumer Access.
Frequently Asked Questions
Do I still own my home with a reverse mortgage?
Yes. You keep the title to your home. The lender has a lien, just as with a traditional mortgage.
What happens to my home when I die?
The loan becomes due. Your heirs can repay the loan and keep the home, sell the home and keep any remaining equity, or deed the property to the lender. They typically have time to decide and arrange financing.
Can I lose my home with a reverse mortgage?
Yes, if you fail to pay property taxes or insurance, do not maintain the home, or no longer live there as your principal residence.
Is reverse mortgage money taxable?
Generally no. Proceeds are treated as loan advances rather than income. Consult a tax professional for your circumstances.
Can I get a reverse mortgage if I still owe on my home?
Yes, if you have enough equity. The existing mortgage must be paid off with reverse mortgage proceeds or other funds at closing.
This article is for general informational purposes only and is not legal, medical, tax, or financial advice. Rules vary by state and change over time; confirm details with the relevant agency or a licensed professional.
