For many retirees, their home represents their largest asset—and their greatest source of untapped wealth. A reverse mortgage offers a way to convert that home equity into cash without selling your home or making monthly mortgage payments. But this financial tool is frequently misunderstood, sometimes oversold, and not right for everyone.

Understanding how reverse mortgages actually work—beyond the television commercials—is essential before making a decision that affects your most valuable asset.

What Is a Reverse Mortgage?

A reverse mortgage is a loan that allows homeowners aged 62 or older to borrow against their home equity while continuing to live in the home. Unlike a traditional mortgage where you make payments to a lender, a reverse mortgage pays you—and the loan balance grows over time as interest accumulates.

The most common type is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration. HECMs account for about 90% of all reverse mortgages and come with consumer protections that proprietary reverse mortgages may lack.

How Reverse Mortgages Work

When you take out a reverse mortgage, you can receive funds in several ways:

  • Lump sum: One large payment at closing (fixed rate only)
  • Monthly payments: Regular disbursements for a set period or as long as you live in the home
  • Line of credit: Draw funds as needed, with unused portions growing over time
  • Combination: Mix of the above options

The amount you can borrow depends on:

  • Your age (older borrowers qualify for more)
  • Current interest rates (lower rates mean higher borrowing limits)
  • Home value (up to FHA limits)
  • Existing mortgage balance (must be paid off with reverse mortgage proceeds)

Who Qualifies?

HECM requirements include:

  • Age: At least 62 years old (all borrowers on title must qualify)
  • Primary residence: Must be your main home
  • Eligible property: Single-family homes, 2-4 unit properties (if owner-occupied), FHA-approved condos, manufactured homes meeting requirements
  • Equity: Generally need at least 50% equity
  • Financial assessment: Demonstrate ability to pay property taxes, insurance, and maintenance
  • Counseling: Must complete HUD-approved counseling session

The Costs Involved

Reverse mortgages come with significant costs that reduce your available equity:

Upfront costs:

  • Mortgage insurance premium (MIP): 2% of home value
  • Origination fee: Up to $6,000 depending on home value
  • Closing costs: Appraisal, title insurance, recording fees, etc.

Ongoing costs:

  • Annual MIP: 0.5% of outstanding balance
  • Interest accrual: Compounds on loan balance
  • Servicing fees: Monthly fee for loan administration

These costs can be financed into the loan (reducing your available proceeds) or paid out of pocket.

Advantages of Reverse Mortgages

Access cash without selling: Convert equity to usable funds while staying in your home.

No monthly payments: The loan doesn't require repayment until you leave the home.

Flexible disbursement: Choose how and when you receive funds.

Non-recourse loan: You'll never owe more than the home's value at sale; FHA insurance covers any shortfall.

Line of credit growth: Unused credit line portions grow over time at the same rate as your interest rate.

Tax-free proceeds: Loan proceeds generally aren't considered taxable income.

Disadvantages and Risks

Eroding equity: As interest compounds, your equity shrinks—potentially leaving little or nothing for heirs.

High costs: Upfront and ongoing fees can be substantial, especially for short-term use.

Complexity: The product is complicated, making it easier to misunderstand terms and implications.

Impact on benefits: Proceeds could affect Medicaid eligibility and certain benefit programs.

Foreclosure risk: Failing to pay property taxes, insurance, or maintain the home can trigger default.

Spouse concerns: Non-borrowing spouses face complications if the borrowing spouse dies or enters long-term care.

When a Reverse Mortgage Might Make Sense

Consider a reverse mortgage if you:

  • Plan to stay in your home long-term
  • Have significant equity and limited other retirement income
  • Want to delay Social Security for higher benefits later
  • Need to eliminate existing mortgage payments
  • Have no strong desire to leave your home to heirs
  • Understand and accept the costs and trade-offs

When to Consider Alternatives

A reverse mortgage may not be ideal if you:

  • Might need to move in the next few years
  • Want to preserve home equity for heirs
  • Have other less expensive options (home equity loan, downsizing)
  • Can't afford property taxes and insurance
  • Have health issues that might require moving to assisted living

Alternatives to explore:

  • Traditional home equity loan or line of credit
  • Downsizing to a less expensive home
  • Renting out a portion of your home
  • State and local property tax relief programs
  • Other retirement income strategies

The Required Counseling Session

HUD requires all HECM applicants to complete counseling with an approved agency before proceeding. This isn't a formality—it's a valuable opportunity to:

  • Understand all aspects of the loan
  • Explore whether it fits your situation
  • Learn about alternatives
  • Get questions answered by an independent party

Take this session seriously. A good counselor can help you avoid a costly mistake or confirm that a reverse mortgage makes sense for you.

Making an Informed Decision

A reverse mortgage is neither inherently good nor bad—it's a tool that helps some retirees and harms others. The difference lies in understanding what you're getting into, why you need the funds, and how the loan fits your overall financial picture.

Never let urgency or sales pressure drive this decision. Take time to consult with a financial advisor, complete the required counseling, and involve family members who might be affected. Your home is likely your most valuable asset—treat decisions about it accordingly.