A reverse mortgage is a type of loan designed specifically for older homeowners that allows them to borrow against the equity they have built up in their property. Unlike a traditional mortgage where you make monthly payments to a lender, a reverse mortgage involves the lender making payments to you.

How a HECM Works

The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is federally insured by the FHA. With a HECM, you are converting part of your home equity into cash. You do not have to pay back the loan as long as you live in the home as your primary residence, continue to pay property taxes and homeowners insurance, and maintain the property.

Eligibility Requirements

To qualify for a reverse mortgage, you must meet strict guidelines:

  • Age: You (or your borrowing spouse) must be at least 62 years old.
  • Equity: You must own the property outright or have a significant amount of equity built up (usually at least 50%).
  • Residence: The property must be your primary residence.
  • Financial Capability: You must demonstrate you can continue paying for property taxes, homeowners insurance, and maintenance.

How You Receive the Money

Depending on your financial goals, you can choose to receive your reverse mortgage funds in a variety of ways:

  • Lump Sum: Receive all the available cash at once (only available with fixed-rate loans).
  • Monthly Payments: Receive fixed monthly advances either for a set term or for as long as you live in the home.
  • Line of Credit: Draw funds on demand up to your approved limit. The unused portion actually grows over time.

What Happens When the Loan Ends?

The loan becomes due when the last surviving borrower dies, sells the home, or moves out for longer than 12 consecutive months (such as moving into an assisted living facility). At that point, the loan balance—including all the money advanced to you plus accumulated interest and fees—must be repaid. Usually, this is accomplished by selling the home.

A Warning About Costs

Reverse mortgages are complex and can be expensive. They come with high upfront fees (origination fees, FHA mortgage insurance premiums) and the interest compounds over time, rapidly shrinking your remaining equity. You are required to complete counseling with a HUD-approved housing counseling agency before you can apply.