How a reverse mortgage works
Some older homeowners can borrow against equity and defer repayment. The balance grows, and the loan is not free cash.
A reverse mortgage is a loan for homeowners who are generally 62 or older and who live in the home. You can often take the proceeds as a lump sum, monthly payments, a line of credit, or a mix. You typically do not make a monthly principal-and-interest payment.
Interest and fees are added to the balance, so the amount owed rises. You must still pay property taxes and homeowners insurance, live in the home, and keep it in reasonable repair.
- Age 62 and older
- HECM
- Required counseling
- Repayment later
What makes it different
01
No required monthly principal and interest
The usual mortgage payment to the lender is deferred. That is the feature people notice first. Taxes, insurance, maintenance, and HOA dues are not deferred. Missing those can put the loan in default.
02
The balance grows
Because interest accrues on a balance you are not paying down, equity shrinks over time if the home’s value does not rise enough to offset it. Heirs inherit the house subject to that debt.
03
HECM counseling
Before a federally insured Home Equity Conversion Mortgage can close, you must meet with a HUD-approved counselor. The session covers costs, the growing balance, and alternatives. It is independent of the lender’s sales process.
04
When the loan ends
The loan is generally repaid when the last borrower sells, moves out for good, or dies. With a HECM, heirs can usually sell the home to satisfy the debt and are not required to pay more than the home is worth if they follow the program’s repayment rules.
Costs people miss
- Hecms charge an upfront mortgage insurance premium and an ongoing premium, plus origination and closing costs.
- A line of credit on a HECM can grow over time under the program’s rules. That growth is not the same thing as extra equity.
- Leaving the home for a long stretch, including some nursing-home stays, can make the loan due.
- A reverse mortgage is one way to use equity. A HELOC, a home equity loan, or selling the house are others, and each has different requirements.
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MortgageDirectory.com explains how home loans work. It is not a lender, broker, or quote service, and nothing here is personal financial, tax, or lending advice. Rates, fees, and approvals come from lenders and depend on your situation.