Overview
A reverse mortgage is a federally insured loan that lets qualifying homeowners tap their home equity without selling or making monthly mortgage payments. The most common reverse mortgage is the Home Equity Conversion Mortgage (HECM), insured by the Federal Housing Administration (FHA). HECMs are the industry standard and include consumer protections such as mandatory counseling and mortgage insurance (see HUD for program details).
In my 15+ years advising older clients, I’ve seen reverse mortgages help people solve cash-flow gaps, pay for home care, or delay Social Security claiming. They are a flexible tool, not a one-size-fits-all solution.
HECMs differ sharply from home-sale strategies and some private reverse mortgage products. HECMs are regulated and carry explicit fee structures and borrower protections (U.S. Department of Housing and Urban Development — HUD).
(For a deeper HECM-oriented guide, see What is a Home Equity Conversion Mortgage (HECM)? and reverse mortgage basics articles on FinHelp.)
How a reverse mortgage works
- Principal limit: Lenders calculate the amount you can borrow (principal limit) using your age, the home’s appraised value, current interest rates, and HECM lending limits. Older borrowers and higher-value homes generally yield larger principal limits.
- Payment options: HECM borrowers can take proceeds as a lump sum, term payments, tenure (regular monthly payments while living in the home), a line of credit, or combinations of these. Each option changes cash flow and interest accrual.
- Repayment: The loan becomes due when the last borrower permanently leaves the home or dies. Typically the property is sold, the loan repaid from sale proceeds, and remaining equity (if any) goes to the homeowner or heirs.
Who is eligible?
- Age: At least one borrower must be 62 years old or older for a HECM.
- Primary residence: The home must be your principal residence.
- Home type: Single-family homes, 2–4 unit homes with one unit occupied by the borrower, HUD-approved condos, and some manufactured homes may qualify.
- Financial assessment: Lenders evaluate whether you can meet ongoing property charges such as taxes, insurance, HOA fees, and maintenance. Failure to keep up with these obligations can trigger default and foreclosure.
- Counseling: FHA requires prospective HECM borrowers to complete HUD-approved counseling to ensure they understand costs, alternatives, and obligations (see Reverse Mortgage Counseling Requirement on FinHelp and HUD counseling resources).
Costs: what to expect and typical ranges
Reverse mortgages include several fees that reduce the net proceeds. Exact amounts depend on lender choices, property value, and HECM rules. Below are the common cost components and current common ranges; always confirm quoted numbers with a lender and check HUD’s HECM pages.
- Origination fee: Lenders charge an origination fee. HECM origination fees vary by lender; many borrowers see origination fees in the low thousands or presented as a percentage. Origination fees are sometimes refundable if the loan is paid off early. Check HUD’s guidance and lender disclosures for current caps and schedules.
- Up-front mortgage insurance premium (MIP): For HECMs, an initial MIP typically equal to a percentage of the maximum claim amount is charged at closing. The FHA also charges an annual MIP (a percentage of the outstanding principal balance). These insurance charges protect borrowers and lenders and enable non-recourse protections under HECM rules (see HUD on HECM mortgage insurance).
- Closing costs: Include appraisal, title, recording, credit report, and attorney fees. Closing costs for HECMs commonly range from a few thousand dollars depending on local fees and services.
- Servicing fees: Lenders may charge a monthly servicing fee for administration of the loan. This fee varies by lender; typical amounts are modest but add up over time.
- Interest: Interest accrues on the outstanding balance. HECM loans can use fixed or adjustable rates. With adjustable-rate HECMs, rate changes affect how quickly the balance grows.
Note: Exact fee amounts and origination-fee caps change over time. Consult HUD’s HECM page and a lender’s Good Faith Estimate for current figures (HUD.gov; CFPB guidance).
How costs affect your net proceeds and estate
Because fees, MIP, and accrued interest are added to the loan balance, the outstanding loan amount can grow significantly over time. That reduces the equity that remains for heirs or for sale proceeds. HECM loans are generally non-recourse: if the loan balance exceeds the home value at repayment, neither borrowers nor heirs owe more than the home’s value (FHA insured), but the home is used to repay the loan.
In short:
- Higher initial costs and rates = lower immediate cash-out and faster balance growth.
- Choosing a lump sum vs. line of credit influences how fast interest accrues. Lump sum withdrawals start accruing interest on the full amount immediately. A line of credit accrues interest only on amounts actually drawn and grows with an unused-line feature that can increase available funds over time.
Pros and cons — practical considerations
Pros
- No monthly mortgage payments required while living in the home (you must still pay taxes, insurance, and HOA fees).
- Flexible payout options to match cash-flow needs.
- Non-recourse protection for HECMs limits borrower liability to the home’s value.
Cons
- Fees and insurance reduce upfront proceeds and can make the loan expensive relative to other options.
- Interest accrues, lowering inheritance for heirs.
- Failure to pay property charges or maintain occupancy can lead to foreclosure.
Real-world examples (anonymized client cases)
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Medical expenses: A client in her late 70s used a HECM line of credit to cover out-of-pocket medical costs. She kept the line reserved and drew smaller amounts as needed. This approach minimized interest accrual while preserving liquidity.
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Lifestyle spending: A retired couple used a HECM tenure payment option to receive monthly funds they used for travel and everyday expenses. The loan removed the need for large withdrawals from their investment portfolio during a market downturn.
These cases illustrate different strategies: reserve liquidity with a line of credit, or supplement monthly income with tenure or term payments. In my practice I evaluate how a reverse mortgage interacts with pension income, investments, and means-tested benefits before recommending it.
Interaction with Social Security, Medicare, and Medicaid
- Social Security and Medicare: Reverse mortgage proceeds are not considered taxable income and generally do not affect Social Security or Medicare eligibility.
- Medicaid and means-tested benefits: Loan proceeds that are deposited into a bank account and remain there can affect Medicaid eligibility. If you receive large sums, talk to a benefits counselor or elder-law attorney about timing withdrawals and spend-down strategies.
For benefit-impact questions, check CFPB resources and consult a benefits specialist.
Common mistakes to avoid
- Skipping counseling: HUD-approved counseling is mandatory for HECMs and helps identify alternatives.
- Underestimating ongoing costs: Property taxes, insurance, and maintenance are crucial; missing these payments can trigger default.
- Using all proceeds at once: Large lump-sum withdrawals accelerate interest accrual and reduce options later.
- Ignoring heirs: Discuss plans with family so heirs understand the loan’s implications and repayment timeline.
How to compare lenders and loan options
- Request a written Good Faith Estimate showing all fees, MIP, servicing charges, and projected balances under plausible scenarios.
- Compare line-of-credit growth features, fixed vs. adjustable rates, and origination-fee structures.
- Confirm the lender’s experience with HECMs and read recent customer reviews. Ask for a local closing-cost estimate and sample loan amortization illustrating balance growth over time.
Steps to apply (typical process)
- Complete HUD-required counseling with an independent counselor (find a counselor on HUD’s site).
- Choose a HUD-approved lender and apply; the lender will order an appraisal and perform a financial assessment.
- Review loan disclosures, including the closing statement and counseling certificate.
- Close the loan; funds are distributed per the selected payment plan.
- Maintain property obligations while living in the home. The loan becomes due when the last borrower leaves the home permanently or dies.
Frequently asked questions
- Will I lose my home? You can remain in the home as long as you meet loan obligations. Foreclosure can result only from failure to pay taxes, insurance, or maintain occupancy.
- What happens when I die? The loan must be repaid. Heirs can sell the home to repay the loan or refinance into a traditional mortgage if they wish to keep the property.
- Can I refinance a traditional mortgage into a HECM? Yes — a HECM reverse mortgage can be used to pay off an existing mortgage, but closing costs and MIP apply. Compare costs to a forward refinance.
Next steps and resources
- Read HUD’s HECM program page for the official program rules and the latest fee limits: https://www.hud.gov/program_offices/housing/sfh/hecm/hecmhome (HUD).
- Consumer-friendly guidance from the Consumer Financial Protection Bureau: https://www.consumerfinance.gov/ask-cfpb/what-is-a-reverse-mortgage-en-314/ (CFPB).
Internal resources on FinHelp:
- What is a Home Equity Conversion Mortgage (HECM)? — https://finhelp.io/glossary/what-is-a-home-equity-conversion-mortgage-hecm/
- Reverse Mortgages: How They Work and Common Misconceptions — https://finhelp.io/glossary/reverse-mortgages-how-they-work-and-common-misconceptions/
- Reverse Mortgage Counseling Requirement — https://finhelp.io/glossary/reverse-mortgage-counseling-requirement/
Professional disclaimer
This article is educational and not personalized financial, legal, or tax advice. Rules and fee schedules change; consult a HUD-approved counselor, a qualified mortgage professional, and, if needed, an elder-law attorney or financial planner before proceeding.
Sources: U.S. Department of Housing and Urban Development (HUD), Consumer Financial Protection Bureau (CFPB), and industry lender disclosures.
