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A reverse mortgage is a unique type of loan designed for homeowners, typically those aged 62 and older in the U.S., who want to convert a portion of their home equity into cash. Unlike a traditional mortgage where you make monthly payments, a reverse mortgage allows you to receive payments while retaining ownership of your property and avoiding monthly mortgage payments. The loan repayment is postponed until you no longer live in the home.

What is a Reverse Mortgage?

In a traditional mortgage, a homeowner makes regular payments, increasing their equity over time until the loan is paid off. With a reverse mortgage, the opposite occurs: you receive funds, and the loan balance increases over time as interest and fees are added to the principal. This means your equity decreases as the loan balance grows.

If your home significantly increases in value after taking out a reverse mortgage, it may be possible to obtain additional reverse mortgages to borrow against the increased equity.

Who Qualifies for a Reverse Mortgage?

To qualify for a reverse mortgage in the United States, applicants must meet certain criteria:

• You must be at least 62 years old.
• You must pay off any existing mortgages with the proceeds from the reverse mortgage, potentially using additional personal funds if needed.
• There are generally no minimum income or credit score requirements for most reverse mortgages, and the funds can typically be used for any purpose. However, an unresolved bankruptcy could delay the process.
• Certain types of homes, such as some lower-value mobile homes, may not qualify.
• Applicants are required to seek HUD-approved counseling before borrowing.

Some state and local governments also offer reverse mortgages, though these "public sector" loans often have specific usage limitations, such as funding home repairs or property taxes. The majority of reverse mortgages are insured by the Federal Housing Administration (FHA).

How Do Reverse Mortgage Payments Work?

The amount of money an individual homeowner can receive from a reverse mortgage depends on several factors, including their age, the FHA or Fannie Mae (FNMA) appraised value of the home, and the initial interest rate effective upon loan closing. The home's location can also play a role. There are also specific reverse mortgage options for homes valued above the maximum Fannie Mae limits.

In a U.S. reverse mortgage, you can choose to receive payments in various ways:

• A lump sum payment.
• Monthly advances.
• A growing line of credit.
• A combination of these options.

Generally, loan advances from a reverse mortgage are not considered taxable income and do not affect Social Security or Medicare benefits. However, if you receive Medicaid, SSI, or other public benefits, loan advances held in an account (like savings or checking) beyond the end of the calendar month in which they are received may be counted as "liquid assets." If your total liquid assets then exceed program limits, you could lose eligibility for such public programs.

What Are the Costs of a Reverse Mortgage?

The costs associated with obtaining a reverse mortgage from a private sector lender can be higher than those for other types of mortgage loans. These costs typically include:

• An initial mortgage insurance premium.
• An origination fee.
• Standard closing costs, which can amount to several thousands of dollars.
• A monthly service charge, which is usually added to the total loan amount.

The lowest-cost reverse mortgages are often offered by state and local governments. These programs typically feature low or no loan fees and low or moderate interest rates. However, they often come with specific limitations, and not all states offer such programs.

When Does a Reverse Mortgage End?

A reverse mortgage loan typically becomes due when the homeowner passes away or permanently moves out of the home (for example, to an assisted living facility). At this point, the loan is usually paid off by the proceeds from the sale of the house. If the sale proceeds exceed the loan amount, the homeowner (if still living) or their heirs receive the difference. If the proceeds are not enough to cover the loan, the lender (or the mortgage insurance protecting the lender) covers the difference. This limit on debt is known as "non-recourse," meaning the lender's legal recourse is limited to the value of the home itself.

Volume of Reverse Mortgages

The most common type of reverse mortgage in the U.S. is the FHA-insured Home Equity Conversion Mortgage (HECM), which accounts for a large majority of all reverse mortgages originated. Since its inception in 1989, the HECM program has seen hundreds of thousands of loans originated. The program has experienced significant growth, with tens of thousands of new HECM loans originated annually in recent years. While the HECM program is governed by Section 255 of the National Housing Act, program limits and regulations can change over time. Historically, there have been discussions and efforts to adjust caps on the number of HECM loans available.

Are There Alternatives to a Reverse Mortgage?

One of the main considerations with reverse mortgages is the potentially high upfront costs. Some seniors may want to explore other options to tap into their home equity, especially if they do not plan to remain in the home for an extended period (e.g., at least seven years). Alternatives could include a home equity loan, a home equity line of credit (HELOC), or selling the home and downsizing.

Frequently Asked Questions

Are reverse mortgage proceeds taxable?

Generally, the money you receive from a reverse mortgage is considered loan advances, not income, and is therefore not taxable.