The Basics of Reverse Mortgages

Are you a senior homeowner in need of greater cash flow? If so, you may have a way to use the equity you’ve built in your home without having to take out a second loan – or sell your property. It’s called a reverse mortgage, a unique type of loan that can be an excellent way to improve your overall financial picture.


The Benefits

The word “reverse” says it all: rather than making monthly mortgage payments, you receive them instead. The cash payments are tax free, and in most cases have no effect on your Social Security or Medicare benefits. You will never be forced out of your home, and the loan does not have to be repaid unless you move, sell the home, or die. The amount of money you may be able to borrow depends on your age (the older you are, the more you are generally able to receive), the reverse mortgage type, your home’s value, where your home is located, and current interest rates.

The basic requirements to qualify for a reverse mortgage are:

  • You have to be at least 62
  • You must live in the home
  • There must be equity in the home

There are several types of reverse mortgages:

  • Single-purpose reverse mortgages are offered by some government and nonprofit organizations to low or moderate-income seniors. Though borrowing costs tend to be inexpensive, availability is limited, there are income restrictions, and the cash can only be used for a specific purpose such as home improvements, repairs, or property taxes.

  • Home Equity Conversion Mortgages (HECMs) are widely available loans that are backed by the Department of Housing and Urban Development (HUD). There are no income restrictions or medical requirements and you can use the money for whatever you like. To get a HECM, the majority of the existing mortgage must be paid, and you must first meet with a HUD-certified counselor who will thoroughly explain the details of the loan.

  • Proprietary reverse mortgages are private loans and are typically the most costly option. They may be appropriate if your home’s value is very high since they can give higher cash advances than HECMs. The money can be used for any purpose and there are no income limits.


The Drawbacks

While reverse mortgages can be a great way to increase your cash flow, there are a few downsides to consider:

  • These are not free loans! Origination fees, closing costs, and servicing fees can be high, and you will be charged interest on the outstanding balance.

  • Most reverse mortgages have variable interest rates. If the rate rises, the loan becomes more expensive.

  • Your total debt increases rather than decreases over time.

  • Since you are using some or all of your home’s equity, your heirs may inherit property with a large outstanding balance.

  • Interest on reverse mortgages is not deductible on income tax returns until the loan is at least partially repaid.


Know Before You Borrow

Deciding which type of reverse mortgage to pursue can be a challenge. Don’t be afraid to ask a lot of questions, including:

  • What type of interest rate can I receive? Is it fixed or variable?

  • How much will I have to pay for the origination fee, closing costs, and servicing fees?

  • What will the Total Annual Loan Cost be?

HECM and proprietary loans can seem quite similar, so if you are trying to decide between the two, request a side-by-side comparison from the lender or counselor.

You should not feel any sales pressure when inquiring about a reverse mortgage. Never make a decision before you are ready or if you feel you are being led into a product you don’t fully understand or need. If you change your mind after signing a reverse mortgage contract, you have at least three business days to cancel (in writing) for any reason and without penalty. Once the loan is canceled, the lender must return any financing fees you may have paid.

In most cases, the process of receiving a reverse mortgage is a positive experience. However, fraud does exist. If you suspect any illegal activity, file a complaint with your state Attorney General’s office or state banking regulatory agency, as well as the Federal Trade Commission:; 877-382-4357.



For more information about reverse mortgages, contact:

AARP Foundation
Reverse Mortgage Education Project
601 E Street, NW
Washington, DC 20049

U. S. Department of Housing and Urban Development (HUD)
451 7th Street, SW
Washington, DC 20410