Is a Reverse Mortgage a Good Idea for Seniors?

A reverse mortgage allows homeowners, typically aged 62 or older, to convert a portion of their home equity into cash. This financial product is structured as a loan secured by the home, providing funds without requiring monthly mortgage payments. Unlike a traditional mortgage where a borrower makes payments to a lender, a reverse mortgage involves the lender paying the homeowner. The homeowner retains the title to their property. Funds can be utilized for various purposes, such as supplementing retirement income, covering medical expenses, or making home improvements.

Eligibility Requirements

To qualify for a reverse mortgage, specific criteria must be met. The primary borrower must be at least 62 years old, though some proprietary programs may allow borrowers as young as 55. The home must serve as the borrower’s primary residence, meaning they live there for the majority of the year.

Borrowers need significant equity in their home, often at least 50%, or own the home outright. If an existing mortgage is present, its balance must be paid off at closing using either the borrower’s funds or the reverse mortgage proceeds. Eligible property types include single-family homes, multi-unit properties with up to four units where one unit is occupied by the borrower, and certain HUD-approved condominiums and manufactured homes. A mandatory counseling session with an independent, HUD-approved counselor is also required for all borrowers to ensure understanding of the loan’s implications.

How Funds Are Received

Borrowers can receive reverse mortgage proceeds through several methods. One option is a single, one-time lump sum disbursement of the full loan amount at closing, which often comes with a fixed interest rate.

Alternatively, borrowers can opt for tenure payments, which provide equal monthly payments for as long as at least one borrower lives in and occupies the home as a principal residence. Term payments involve receiving equal monthly payments for a fixed period chosen by the borrower. Another common method is a line of credit, where funds are available to the borrower to draw upon as needed, up to a maximum amount. The unused portion of a line of credit can grow over time, increasing the amount available for future draws.

A combination of these options is also possible, such as an initial lump sum followed by a line of credit, or a line of credit with tenure payments. Interest accrues on the outstanding loan balance, including any interest and fees, and is added to the loan balance over time. This means the loan balance grows, and the homeowner’s equity in the property decreases.

Costs and Fees Involved

A reverse mortgage involves several costs and fees that impact the total loan balance. An origination fee is charged by the lender, typically calculated as 2% of the first $200,000 of the home’s value and 1% of the amount over $200,000, with a maximum cap of $6,000. For homes valued at less than $125,000, the origination fee can be up to $2,500. This fee can often be financed into the loan.

Mortgage Insurance Premium (MIP) is another significant cost. There is an initial MIP, a one-time upfront charge of 2% of the lesser of the home’s appraised value or the maximum lending limit, which for 2025 is $1,209,750. An annual MIP of 0.5% of the outstanding loan balance accrues monthly and is added to the loan balance.

Borrowers also incur various closing costs, similar to a traditional mortgage. These can include appraisal fees, title insurance, recording fees, and attorney fees. Servicing fees are ongoing charges for managing the loan, which for adjustable-rate HECM loans can be up to $35 per month and for fixed-rate HECM loans up to $30 per month.

Maintaining Home Ownership

The homeowner retains the title to their property. Retaining ownership comes with ongoing responsibilities that borrowers must fulfill to keep the loan in good standing.

Borrowers are obligated to pay property taxes on time, maintain adequate homeowner’s insurance, and keep the home in good condition. The property must also remain the borrower’s primary residence, meaning they must live there for the majority of the year, typically at least 183 days annually. Failure to meet these obligations, such as neglecting property taxes or insurance, or allowing the home to fall into disrepair, can lead to the loan being declared in default. The loan could then become due and payable, potentially resulting in foreclosure if the borrower cannot remedy the default.

Repayment and Estate Considerations

A reverse mortgage becomes due and payable upon specific “maturity events.” These typically include the death of the last surviving borrower, or if the home is no longer the primary residence. Failure to meet ongoing loan terms, like not paying property taxes or homeowner’s insurance, or not maintaining the property, can also trigger the loan to become due.

When a maturity event occurs, the loan balance, which includes the principal, accrued interest, and fees, becomes due. Heirs or the estate are then responsible for repaying the loan. They can sell the home to repay the loan and keep any remaining equity, or they can choose to refinance the loan into a traditional mortgage if they wish to keep the property.

A significant protection for heirs is the “non-recourse” feature of most reverse mortgages, particularly federally insured Home Equity Conversion Mortgages (HECMs). This means heirs are generally not personally liable for the loan balance if it exceeds the home’s value. Heirs typically have the option to pay 95% of the home’s appraised value or the full loan balance, whichever is less, to keep the home. If heirs do not take action, the lender may initiate foreclosure proceedings. The reverse mortgage impacts the equity remaining in the home, potentially reducing the financial legacy for heirs.