How Does a Reverse Mortgage Work?
If you’re a homeowner nearing retirement and looking to tap into the equity of your home without selling it, you may be wondering: how does a reverse mortgage work? For many seniors, this financial tool offers the opportunity to age in place while accessing much needed funds to support healthcare, daily living, or even travel and leisure.
But while a reverse mortgage sounds appealing, it’s essential to understand exactly how it works, who qualifies, and what the long-term implications are before moving forward. In this blog, we’ll break it all down simply and clearly.
What Is a Reverse Mortgage?
A reverse mortgage is a type of loan available to homeowners aged 62 or older that allows them to convert part of their home’s equity into tax-free cash. Unlike a traditional mortgage, where the homeowner makes payments to the lender, a reverse mortgage pays the homeowner instead.
The most common type is the Home Equity Conversion Mortgage (HECM), which is federally insured and regulated by the FHA.
How Does a Reverse Mortgage Work?
Here’s the basic idea: you’ve built up equity in your home over the years, either by paying off your mortgage or through rising property values. A reverse mortgage lets you access a portion of that equity while continuing to live in your home. You don’t have to make monthly payments on the loan. Instead, the loan is repaid when you move out, sell the home, or pass away.
There are several ways to receive the money:
- A lump sum
- Monthly payments
- A line of credit
- A combination of the above
Interest accrues on the loan balance over time, and the amount you owe grows the longer the loan remains unpaid.
Who Qualifies for a Reverse Mortgage?
To qualify for a HECM reverse mortgage, you must:
- Be at least 62 years old
- Own your home outright or have a low mortgage balance
- Live in the home as your primary residence
- Be financially capable of paying property taxes, homeowners insurance, and maintenance costs
- Attend a HUD-approved counseling session
Reverse mortgages are typically available for single-family homes, HUD-approved condos, and some manufactured homes.
How Much Money Can You Get?
The amount you can borrow depends on several factors:
- Your age (or the age of the youngest borrower)
- The appraised value of your home
- Current interest rates
- FHA lending limits (as of 2025, the max HECM limit is $1,149,825)
Older borrowers with more equity generally qualify for larger loan amounts. Tools like the Reverse Mortgage Calculator can help estimate your eligibility.
What Are the Costs of a Reverse Mortgage?
Just like a traditional mortgage, reverse mortgages come with fees. These include:
- Origination fees (capped at $6,000 for HECMs)
- Mortgage insurance premiums
- Appraisal and closing costs
- Servicing fees
These costs are often rolled into the loan, meaning you don’t pay them upfront but they reduce your available proceeds.
Pros of a Reverse Mortgage
No Monthly Mortgage Payments
As long as you live in the home and meet basic obligations like taxes and insurance, you won’t have to make payments.
Flexible Payout Options
Lump sum, monthly income, or line of credit — the choice is yours.
Stay in Your Home
You can continue to live in your home while accessing its equity.
Tax-Free Proceeds
Reverse mortgage funds are considered loan proceeds, not income, so they are typically not taxable.
Non-Recourse Protection
You or your heirs will never owe more than the home’s value, even if the loan balance exceeds it.
Also Read: Can I Sell My House with Code Violations or City Liens?
Cons of a Reverse Mortgage
Accrued Interest Reduces Equity
Over time, interest adds up, reducing the inheritance you leave behind.
High Fees
Upfront and ongoing costs can eat into the value you receive.
Foreclosure Risk
If you fail to pay property taxes or maintain the home, the loan could default.
Not Ideal for Short-Term Needs
If you plan to move in a few years, it might not be worth the cost.
Impact on Needs-Based Benefits
Reverse mortgage income may affect programs like Medicaid or Supplemental Security Income.
Risks of a Reverse Mortgage
In addition to general drawbacks, several specific risks should be considered before applying:
Foreclosure Is Still Possible
Even without monthly loan payments, the loan can default if you fail to pay property taxes, homeowner’s insurance, or maintain the property.
Rapidly Increasing Debt
Interest is added every month, causing your loan balance to grow and potentially consuming most of your equity over time.
Impact on Estate Planning
A reverse mortgage can severely limit what you pass on to your heirs, especially if the balance grows beyond the home’s value.
Mandatory Repayment Upon Moving
If your health changes and you need to move into assisted living, the loan becomes due. This may create unwanted pressure to sell quickly.
Non-Borrowing Spouse Challenges
If only one spouse is listed on the reverse mortgage, the surviving spouse may lose the right to stay in the home unless FHA protections were properly followed.
What Happens When You Die or Move?
When the last borrower dies, sells the home, or moves out permanently, the loan becomes due. Heirs then have the option to:
- Repay the loan and keep the home
- Sell the home to pay off the loan
- Walk away, since it’s a non-recourse loan and the lender cannot pursue other assets
If heirs wish to retain the property, they generally need to pay the lesser of the loan balance or 95 percent of the appraised home value.
Common Misconceptions About Reverse Mortgages
“My lender owns the home.”
False. You retain the title and ownership of your home.
“My kids will be stuck with the debt.”
No. Reverse mortgages are non-recourse loans. Heirs are not personally responsible for repayment beyond the home’s value.
“You can outlive the loan.”
Incorrect. As long as you live in the home and meet the loan terms, the loan remains active.
Also Read: Should I Repair or Sell My House?
Is a Reverse Mortgage Right for You?
A reverse mortgage can be a useful tool for:
- Homeowners who plan to age in place
- Seniors with significant home equity and limited retirement income
- Individuals looking to eliminate a traditional mortgage
However, it may not be a good choice if you plan to move, need to preserve your home’s value for heirs, or aren’t confident you can keep up with property related costs.
Alternatives to a Reverse Mortgage
If you’re unsure about committing to a reverse mortgage, consider these other strategies:
- Home Equity Line of Credit (HELOC)
Provides access to equity but requires monthly payments. - Cash-Out Refinance
Refinance your current mortgage with a new, larger loan to access equity. - Downsizing
Sell your current home and purchase a smaller property to free up cash. - Sell and Rent
Some homeowners sell their home and rent a smaller space. In certain cases, BuysHouses.co may be able to buy your home and offer a rent-back agreement. This gives you access to equity while staying in familiar surroundings without taking on debt. - Shared Equity Agreements
You get cash in exchange for a percentage of your home’s future value.
Real World Example
Martha, age 70, owns a Pittsburgh home valued at $400,000 and has paid off her mortgage. She qualifies for a reverse mortgage and chooses monthly payouts to supplement her Social Security.
The funds help cover home renovations, medical bills, and travel. She continues living in the home for 15 years. After her passing, the home is sold to repay the loan. The remaining equity becomes part of her estate.
Final Thoughts
So how does a reverse mortgage work? It allows older homeowners to tap into their equity without making monthly payments. The loan is repaid when the homeowner sells, moves out, or passes away. While reverse mortgages can provide financial flexibility, they come with long-term costs and risks that must be fully understood.
They can make sense in the right situation, but it’s always smart to explore all options first.
Looking for an Alternative to a Reverse Mortgage?
If your home needs major updates, you’re behind on taxes, or you simply want to unlock equity without the complexity of a loan, BuysHouses.co offers another option. We purchase homes in as-is condition and can even offer a flexible rent-back agreement if you want to stay in your home.
Get a no-obligation cash offer today and see if selling is the smarter move for your retirement plan.