How a reverse mortgage works — the facts on HECMs, costs, obligations, and the scams that target seniors.
A reverse mortgage sounds simpler than it is: the homeowner receives money from a lender using their home's equity as the source, and the loan doesn't have to be repaid until they move out, sell the home, or die. No monthly mortgage payments are required. For a senior who has significant equity in a paid-off or nearly paid-off home but limited monthly income, that can sound like exactly what's needed.
The reality is more complicated. The costs are high relative to other forms of borrowing. The loan balance grows over time rather than shrinking. Certain obligations remain — property taxes, homeowner's insurance, maintenance — and failing to meet them can trigger foreclosure.
This page covers how the most common reverse mortgage — the federally insured Home Equity Conversion Mortgage, or HECM — actually works, what it costs, what it requires, what happens to the home and heirs when the loan comes due, and the specific patterns seniors should know to protect themselves. Or see other loan options available to older adults. We also have information on general home equity loans that seniors may consider.
- NOTE: Fraud and scams are all too money in the marketplace. The marketing around reverse mortgages has a documented history of misleading claims that the Consumer Financial Protection Bureau has taken enforcement action to address more than once.
What a reverse mortgage is — and what it is not
A reverse mortgage is a loan against the equity in your home. Unlike a home equity loan or HELOC, you make no monthly principal or interest payments while you live in the home. Instead, interest and fees accumulate on the loan balance over time, and the full balance is repaid when the loan becomes due. The loan is not a government benefit and not free money. The home remains the borrower's property, and the borrower retains the title — but the growing loan balance reduces the equity available to the homeowner or their heirs over time.
The only reverse mortgage insured by the federal government is the Home Equity Conversion Mortgage (HECM), administered by the Department of Housing and Urban Development through FHA-approved lenders. See the FHA lender search tool (and check the box for reverse mortgages) at https://www.hud.gov/hud-partners/single-family-lender-list .
Private lenders also offer proprietary reverse mortgages — sometimes called jumbo reverse mortgages — which are not FHA-insured and operate under different terms. The HECM is the focus of this page because it carries federal protections that proprietary products do not.
Who qualifies for a HECM
At least one borrower on the loan must be 62 years old or older at the time the loan closes. There is no maximum age. The home must be the borrower's primary residence — vacation homes, investment properties, and rental properties do not qualify. The borrower must either own the home outright or have sufficient equity to pay off any existing mortgage from the reverse mortgage proceeds at closing.
The home must meet FHA property standards and pass an appraisal. Eligible property types include single-family homes, FHA-approved condominiums, and certain manufactured homes. Properties with existing mortgages can qualify if the remaining balance can be paid off at closing using the reverse mortgage funds.
The borrower cannot be delinquent on any federal debt — including federal student loans or federal income taxes — at the time of closing. A financial assessment is conducted to evaluate whether the borrower can continue meeting the ongoing obligations of property taxes, insurance, and home maintenance. If there is concern about the borrower's ability to cover these costs going forward, the lender may require a Life Expectancy Set-Aside — a portion of the loan proceeds reserved specifically for property taxes and insurance.
The mandatory counseling session
Before any HECM loan can be finalized, the borrower — and, where applicable, a non-borrowing spouse — must complete a counseling session with an independent counselor approved by HUD. This is not optional and cannot be waived. The purpose is to ensure the borrower understands how the loan works, what it costs, what obligations it creates, and what alternatives exist. A counselor can also discuss the specific implications for the borrower's estate and heirs.
To find a HUD-approved reverse mortgage counselor, call 1-800-569-4287 or use the counselor search tool at hud.gov at https://answers.hud.gov/housingcounseling/. Counseling can be done by phone or in person. Many HUD-approved counseling agencies provide this service at low or no cost to borrowers with limited means; the fee can also be rolled into the loan. Taking a family member to the counseling session — or asking them to participate by phone — is worth considering, particularly when the home may be part of an inheritance. Another option is to use free or income-based non-profit credit counseling - see the NHPB guide to credit counselors.
How borrowers receive the money
HECM proceeds can be structured four ways: a lump sum, fixed monthly payments, a line of credit, or a combination.
- A lump sum at closing is the only option available on fixed-rate HECMs. Interest begins accruing immediately on the full amount, so the loan balance grows fastest with this choice. It works best when there is a specific, large, immediate need.
- Monthly payments can be structured as term payments — a fixed amount for a set number of years — or tenure payments, which continue for as long as the borrower lives in the home regardless of how long that is.
- A line of credit lets the borrower draw funds as needed up to the approved limit. Interest accrues only on amounts actually drawn, not on available credit sitting unused. The unused portion of the line does not sit idle — it grows automatically over time at the same rate as the loan's interest rate plus the 0.5 percent annual mortgage insurance premium. This means a borrower who draws modestly and leaves most of the line untouched may have access to significantly more than their original limit years later. This growth is not taxable income. Unlike a conventional home equity line of credit, which a bank can freeze or reduce at any time, a HECM line of credit cannot be frozen or cancelled by the lender as long as the borrower meets the loan's obligations.
- A combination approach allocates proceeds across multiple options simultaneously — for example, a partial lump sum to pay off an existing mortgage, a line of credit held in reserve, and monthly tenure payments as ongoing income.
Most borrowers who need flexibility choose the line of credit or a combination rather than taking everything upfront. A HUD-approved counselor can model how different structures affect the loan balance and remaining equity over time — call 1-800-569-4287 before deciding.
What you still owe while living in the home
The absence of monthly mortgage payments does not mean the borrower has no financial obligations. Three ongoing requirements must be met throughout the life of the loan: property taxes must be paid in full and on time, homeowner's insurance must be kept current, and the home must be maintained in reasonable condition.
If any of these obligations are not met, the loan can be declared due and payable — meaning the borrower faces foreclosure proceedings even while still living in the home. This is not a theoretical risk. The National Consumer Law Center has documented significant numbers of older homeowners losing their homes to foreclosure through reverse mortgage defaults, often because of property tax arrears or lapses in insurance.
A senior considering a reverse mortgage should honestly evaluate whether they can sustain property taxes and insurance payments for the foreseeable future. In cases where this is uncertain, the Life Expectancy Set-Aside built into the loan can address it — but it reduces the available loan proceeds. If property taxes are already a struggle, that is important information to discuss with the HUD counselor before proceeding.
What happens when the loan becomes due
The loan becomes due and payable when: the last surviving borrower sells the home or permanently moves out, the last surviving borrower dies, or the borrower fails to meet the obligations of the loan (taxes, insurance, maintenance). "Permanently moves out" includes moving to an assisted living facility or nursing home if the borrower does not return to the home within 12 consecutive months.
At that point, the loan balance — original proceeds plus accumulated interest and fees — must be repaid. The home is typically sold to repay the loan. If the sale proceeds exceed the loan balance, the difference goes to the borrower or to their estate. If the loan balance exceeds the sale proceeds, the FHA insurance covers the shortfall — this is the non-recourse protection built into the HECM program. Neither the borrower nor their heirs are personally liable for any amount beyond the home's value.
Heirs who wish to keep the home have options: they can pay off the loan balance directly, or they can refinance it into a traditional mortgage. They also have the option to walk away from the home if the loan balance exceeds its value, with no personal liability for the difference.
Costs and fees
Reverse mortgages are more expensive than most other forms of borrowing, and those costs compound over time because no payments reduce the balance. Understanding the full cost structure before signing is essential.
The upfront mortgage insurance premium paid to FHA is 2 percent of the appraised home value or the lending limit by year. As an example, on a $400,000 home, that is $8,000. On a home valued at or above the lending limit, the premium is capped at 2 percent. This fee can be rolled into the loan balance rather than paid in cash, but doing so means it immediately begins accruing interest. The ongoing annual mortgage insurance premium is 0.5 percent of the outstanding loan balance, charged monthly and added to the balance.
The loan origination fee is set by a formula capped at $6,000 for HECM loans. Standard closing costs — appraisal, title insurance, recording fees, and credit reports — apply as they would to any mortgage, typically totaling $2,000 to $4,000 depending on location. A monthly servicing fee of $25 to $35 is charged throughout the life of the loan. All of these costs except the appraisal and counseling fee can be financed into the loan balance.
Because most costs are front-loaded and the balance grows rather than shrinks, a reverse mortgage becomes more cost-effective the longer the borrower remains in the home. A senior who takes out a HECM and moves to a care facility three years later will have paid significant fees for limited benefit. A senior who remains in the home for fifteen or twenty years has more time for the benefits to outweigh the costs.
Proprietary reverse mortgages — higher risk, fewer protections, and where fraud concentrates
Private lenders offer reverse mortgages outside the HECM program, called proprietary or jumbo reverse mortgages. Two situations make them worth considering: homes valued above the HECM lending limit (which is set in January of each year with amounts at https://www.hud.gov/hud-partners/single-family-hecmhome) cannot access equity above that ceiling through a HECM, and some proprietary products are available to borrowers as young as 55, compared to the HECM minimum of 62. Outside those two situations, a borrower who qualifies for a HECM has little reason to choose a proprietary product, because the HECM's consumer protections are substantially stronger.
What proprietary products do not provide: the mandatory HUD counseling session is not required, federal insurance does not back the loan, non-recourse protection depends on the lender's contract terms rather than a government guarantee, and fee and cost disclosures are not standardized by HUD. Interest rates are also materially higher.
If a proprietary reverse mortgage is being considered, seek independent review before signing anything. A HUD-approved housing counselor can review the terms of any reverse mortgage product, not only HECMs — call 1-800-569-4287.
The NFCC network of nonprofit credit counselors can also help evaluate whether the product being offered is appropriate — find one at https://www.nfcc.org/agency-finder or call 1-800-388-2227. Do not sign without confirming in writing whether non-recourse protection is included, what the complete fee structure is, and how the lender's failure would affect your loan. Any lender discouraging independent review before closing should be treated as a warning sign.
Scam warning — this is essential reading before you talk to any lender
The reverse mortgage market has a documented and ongoing problem with deceptive advertising and predatory targeting of older homeowners. The CFPB has taken enforcement action against multiple reverse mortgage companies for advertising claims that violated federal law — including companies that falsely told consumers they could never lose their home with a reverse mortgage, that their heirs would automatically inherit the home, and that the product was a government benefit or program. These are all false. Several specific patterns to recognize and reject:
- Any advertisement or sales pitch claiming you "cannot lose your home" or that you are "guaranteed to stay for life" is false. Borrowers who fail to pay property taxes, maintain insurance, or keep the home in good condition can and do face foreclosure. The CFPB took enforcement action against the country's largest reverse mortgage advertiser precisely for making this claim.
- The Department of Veterans Affairs does not offer reverse mortgages. Advertisements implying VA approval or a special VA reverse mortgage product are deceptive. If you see VA mentioned in connection with a reverse mortgage offer, disregard it.
- Contractors who approach you about using a reverse mortgage to pay for home repairs are a known fraud pattern flagged by the CFPB. The contractor wins a large contract; the homeowner takes on a complex loan they may not fully understand. If a repair estimate is the primary driver for considering a reverse mortgage, get independent advice before proceeding.
- Unsolicited reverse mortgage offers — by mail, phone, email, or television advertisement — often target lower-income senior homeowners. The CFPB has documented that roughly three-quarters of reverse mortgage direct mail advertising goes to households with incomes under $75,000, suggesting lower-income older homeowners are disproportionately targeted. Being targeted does not mean the product is right for your situation.
- Any lender or company asking for upfront fees before completing the HUD counseling requirement is not operating within the HECM program. Legitimate HECM lenders cannot close a loan without the HUD counseling certificate.
- Borrowers have a three-day right of rescission after closing a HECM — meaning the loan can be cancelled within three business days for any reason, without penalty, by notifying the lender in writing by certified mail.
To verify that a lender is FHA-approved for HECM loans, use the HUD lender search at hud.gov. To report suspected deceptive advertising or practices, file a complaint with the CFPB at https://www.consumerfinance.gov/complaint/ or call 1-855-411-2372.
Related Content From Needhelppayingbills.com
|
Need help navigating programs?