What Is a Reverse Mortgage and How Does It Work?

What Is a Reverse Mortgage?

A reverse mortgage is a loan that lets eligible homeowners tap into their home equity while continuing to live in the property. You keep ownership and can receive funds in a lump sum, through monthly payments or via a line of credit.

The money you receive is generally considered tax-free, and you don't have to repay the loan as long as you remain in the home and meet your obligations. That includes paying property taxes, maintaining homeowners insurance and keeping up the property.

The loan becomes due when you sell or move out, or when you and your spouse pass away. At that point, the balance must be repaid by you, your spouse or your estate, often through the sale of the home.

Learn more: The Pros and Cons of a Reverse Mortgage

How a Reverse Mortgage Works

A reverse mortgage uses your home as collateral. Instead of making payments to a lender as with a traditional mortgage, the lender pays you—and the loan balance grows over time as interest and fees accrue.

With a home equity conversion mortgage (HECM)—the most common type—you can receive funds in several ways:

• Lump sum: A single upfront payment (the only option with a fixed interest rate)
• Term payments: Fixed monthly payments for a set number of years
• Tenure payments: Fixed monthly payments for as long as you live in the home
• Line of credit: Funds you draw from as needed until the credit line is exhausted
• Combination: Monthly payments paired with a line of credit

How Much Does a Reverse Mortgage Cost?

Reverse mortgages carry significant costs. For HECMs, the upfront mortgage insurance premium (MIP) is 2% of your home's appraised value or the FHA lending limit, whichever is less. The annual MIP is 0.5% of the outstanding loan balance.

Origination fees are capped at $6,000, and third-party closing costs, such as appraisal and title fees, apply as well. Most of these costs can be financed into the loan.

Tip: If you're unsure about which payment option to choose, ask your lender. Some even allow you to switch methods later for a fee.

Types of Reverse Mortgages

When considering a reverse mortgage, you can choose one of these three options:

• Home equity conversion mortgage (HECM): This is the most common type of reverse mortgage, insured by the Federal Housing Administration (FHA) and backed by the Department of Housing and Urban Development (HUD). HECMs can be used for any purpose and are available to homeowners 62 or older.
• Single-purpose reverse mortgage: Offered by some state and local government agencies, as well as some nonprofit organizations, these loans are designed for one purpose only—such as paying for property taxes or home improvements—which is specified by the lender. It is possible to qualify for a single-purpose reverse mortgage with low or moderate income.
• Proprietary reverse mortgage: Proprietary reverse mortgages don't have the same limits as government-backed loans, so they may be better for homeowners who have a high property value and are looking for a bigger loan advance. These loans can typically be used for any purpose.

Reverse Mortgage Requirements

To qualify for an HECM, you must meet the following criteria:

• Be 62 or older (all borrowers on the loan)
• Own the home outright or have substantial equity
• Use the home as your primary residence
• Have no delinquent federal debt
• Have financial resources to cover ongoing property expenses (taxes, insurance and HOA fees)
• Complete a counseling session with a HUD-approved HECM counselor
• Meet FHA creditworthiness and financial assessment standards
• Own a property that meets FHA standards

Eligible property types include single-family homes, two- to four-unit properties with one unit occupied by the borrower, FHA-approved condominiums and qualifying manufactured homes.

How a Reverse Mortgage Amount Is Determined

The amount you can borrow depends on several factors. For HECMs, those factors include:

• The age of the youngest borrower or eligible non-borrowing spouse
• Current market interest rates
• The appraised value of the home
• The HECM lending limit ($1,249,125 for 2026)

Generally, older borrowers and lower interest rates produce higher loan amounts. The FHA uses the lesser of your home's appraised value and the lending limit—so if your home is worth more than the lending cap, only the cap is used in the calculation.

Learn more: How to Pay Back a Reverse Mortgage

Pros and Cons of Reverse Mortgages

A reverse mortgage can provide financial flexibility in retirement, but it also comes with real trade-offs. Here's what to weigh before moving forward.

Who Can Qualify for a Reverse Mortgage?

HECM eligibility is governed by HUD guidelines. Beyond the core requirements listed above, there are a few important details:

• Non-borrowing spouses: If one spouse is under 62, they can't be listed as a borrower. However, HUD rules allow an eligible non-borrowing spouse to stay in the home after the borrowing spouse dies, provided the relationship was disclosed at origination, the couple was legally married at that time and the surviving spouse continues to occupy the home as a primary residence.
• Credit: There is no minimum credit score required for an HECM. However, lenders complete a financial assessment that reviews your credit history and ability to meet ongoing property obligations. A weak credit or income profile may result in a required Life Expectancy Set Aside (LESA), which is an escrow-like reserve that covers property taxes and insurance if you fall behind. It's a good idea to check your credit to get an understanding of your credit profile.
• Proprietary and single-purpose loans: Eligibility requirements vary by lender, program and state. Contact individual lenders or your state's housing agency for specifics.

When to Consider a Reverse Mortgage

A reverse mortgage may be worth considering in these situations:

• You need supplemental retirement income. If your fixed income isn't covering living expenses or health care costs, a reverse mortgage can provide cash without a required monthly payment.
• You can't afford monthly loan payments. Unlike a home equity loan or HELOC, a reverse mortgage doesn't require monthly repayment—just ongoing property expenses.
• You plan to stay in the home long term. Upfront costs are substantial, so a reverse mortgage makes the most financial sense when you intend to stay for many years.
• Leaving a large estate isn't a priority. If maximizing your heirs' inheritance isn't a key goal, converting equity now may make sense.

Learn more: Expenses That Can Rise in Retirement

When a Reverse Mortgage Might Not Be a Good Idea

A reverse mortgage can backfire in certain situations:

• You plan to move soon. The loan comes due when you leave. High upfront costs make a short-term reverse mortgage expensive and difficult to recoup.
• You can't keep up with property expenses. Falling behind on taxes or homeowners insurance can trigger a default, even if you're still living in the home.
• You want to leave the home to your heirs. If your estate can't cover the loan balance from other assets, your heirs may be forced to sell the property.
• Your finances are unstable. The ongoing obligations of a reverse mortgage, including maintenance, taxes and insurance, require reliable financial footing.

Alternatives to Reverse Mortgages

Before committing, consider other ways to access your equity or supplement retirement income:

• Home equity loan: A home equity loan is a lump-sum loan secured by your home equity that you repay in fixed monthly installments. Rates are typically lower than unsecured loans, though your home is on the line if you can't make payments.
• HELOC: A home equity line of credit (HELOC) lets you borrow against your equity as needed, up to a set limit, and repay only what you use. It offers more flexibility than a lump-sum loan, but rates are usually variable and your home serves as collateral.
• Cash-out refinance: A cash-out refinance loan replaces your existing mortgage with a larger one, and you keep the difference as cash. It can be a cost-effective option when interest rates are lower than your current mortgage rate, but it resets your loan term and increases your overall debt.
• Downsizing: Selling your home and purchasing a less expensive property frees up equity without taking on new debt. It can also reduce ongoing housing costs like taxes, insurance and maintenance.
• Government assistance: Programs like Supplemental Security Income (SSI) or state-based property tax relief may help offset retirement expenses without requiring you to borrow against your home. Government assistance eligibility and benefits vary by state and household income.

Compare home equity loans

Check today’s home equity loan offers and current rates to unlock your home’s value with a predictable monthly payment.

Learn more: Home Equity Loan vs. HELOC vs. Reverse Mortgage: What's the Difference?

Frequently Asked Questions

The Bottom Line

A reverse mortgage can be a valuable tool in retirement, but only if it fits your situation. The costs are real, the risks are significant and the effect on your estate can be lasting. Before you apply, meet with a HUD-approved HECM counselor and consider consulting a financial advisor. You can also monitor your credit for free through Experian to make sure your financial profile is strong before you start the process.