How a reverse mortgage works — the basics

A reverse mortgage converts part of your home equity into cash while you continue to live in the house. To qualify for a Home Equity Conversion Mortgage (HECM), the most common type of reverse mortgage, at least one borrower must be age 62 or older and live in the home as their primary residence. The loan balance grows over time for interest and loan advances; you (or your estate) generally repay the loan only when the last surviving borrower dies, sells the home, or permanently moves out.

The U.S. Department of Housing and Urban Development (HUD) administers the HECM program and requires pre-loan counseling to help borrowers understand terms and alternatives (HUD HECM program). The Consumer Financial Protection Bureau (CFPB) also provides plain-language guides about how reverse-mortgage proceeds interact with taxes and need-based benefits (CFPB reverse mortgage resources).

Key payment options available with HECMs include:

  • Lump-sum: one-time payment at closing (often subject to available principal limits).
  • Tenure: equal payments for as long as at least one borrower lives and remains in the home.
  • Term: fixed monthly payments for a set period.
  • Line of credit: withdraw as needed; unused credit may grow over time depending on the plan.
  • Combination plans: mixes of the above to tailor cash flow.

Which option fits best depends on age, home value, plans for the house, and other retirement income sources.

Why HECMs are different from traditional mortgages

  • No required monthly mortgage payments by the borrower. Interest and fees are added to the loan balance instead.
  • HECMs are typically non-recourse loans: borrowers or heirs will not owe more than the home’s value when the loan is repaid (the loan is satisfied from the house sale and any remaining equity goes to heirs). This non-recourse feature is core to HUD-insured HECMs (HUD, HECM overview).
  • HUD requires counseling from an independent agency before proceeding with a HECM; that counselor reviews alternatives and explains obligations, such as paying property taxes and homeowners insurance.

Common misconceptions — and the reality

  • Misconception: “You give up your home or title.” Reality: You retain ownership and the title remains in your name so long as you meet loan obligations (pay property taxes, insurance, and keep the property in good repair). Foreclosure can occur only if those obligations aren’t met.

  • Misconception: “Heirs inherit the loan balance.” Reality: HECMs are non-recourse. Heirs can repay the loan (or sell the property) and keep any remaining equity. They will not be required to pay more than the home’s market value to satisfy the loan.

  • Misconception: “You’ll run out of money quickly.” Reality: Payment option and the line-of-credit growth feature affect longevity. A HECM line of credit can expand the available amount over time, which can help hedge longevity risk. Still, costs and interest can reduce remaining equity, so planning matters.

  • Misconception: “Reverse mortgages are only for desperate homeowners.” Reality: Many borrowers use them strategically for home repairs, medical costs, reducing taxable withdrawals from retirement accounts, or creating a liquidity buffer. They are one tool among many.

  • Misconception: “Reverse mortgage proceeds are taxable income.” Reality: Loan proceeds are generally not reported as taxable income because they are loan advances, not income, but they can affect need-based benefits like Medicaid or Supplemental Security Income depending on how proceeds are received and held; consult CFPB/HUD and your state Medicaid rules before applying (CFPB on taxes & benefits).

Costs and financial mechanics to watch

Reverse mortgages carry fees and recurring costs that can materially affect your estate and future options. Typical cost items include:

  • Origination fees and lender closing costs.
  • Upfront and ongoing mortgage insurance premiums required for HECMs (HUD sets these amounts; check current HUD guidance for exact rates).
  • Interest (fixed or variable) that accrues on the outstanding balance.
  • Servicing fees and possible costs for repairs or property preservation if the loan becomes due.

Because these costs compound over time, the loan balance can grow substantially. That’s why HECMs most often suit homeowners who expect to stay in the house for several years and who have limited alternatives for liquidity.

Eligibility and borrower obligations

Basic eligibility for a federally insured HECM includes: being 62 or older, occupying the property as your principal residence, owning it outright or having a low mortgage balance that the HECM will pay off, and completing HUD-approved counseling. Borrowers must continue paying property taxes, homeowners insurance, and maintain the property; failing to do so can trigger default and require repayment.

Special rules exist for non-borrowing spouses and surviving spouses; protections have evolved, and borrowers should review current HUD guidance and the lender’s disclosures. For details on spouse protections, see our in-depth page: Reverse Mortgage Non-Borrowing Spouse Rule.

How heirs and estates handle repayment

When the loan becomes due, the borrower’s estate typically has options: sell the home to repay the loan, refinance to keep the home, or repay the loan balance in cash. Because HECMs are non-recourse, heirs are not personally liable beyond the value of the home. This is a major difference from second mortgages and many private lending arrangements.

Practical uses and a few real-world examples

In my practice I’ve seen reverse mortgages used effectively for:

  • Funding accessibility upgrades so an older homeowner can age in place.
  • Covering large, one-time medical expenses without selling investments at an unfavorable tax time.
  • Creating a guaranteed monthly supplement (tenure option) to replace a low pension check.

Example: a homeowner used a HECM line of credit to stage withdrawals across three years. Because their unused line of credit grew under program terms, they gained flexibility to meet irregular medical and home repair costs without locking up their retirement accounts.

Alternatives to consider before choosing a reverse mortgage

  • Downsizing and selling the home to buy a smaller, less costly property.
  • A home equity line of credit (HELOC) or home equity loan if you don’t mind monthly payments and have sufficient income.
  • A single-purpose reverse mortgage (offered by some states or nonprofits) for specific uses like home repairs; these often have lower costs but limited availability.

Compare options in detail: see our guides: HECM vs Private Reverse Mortgages: What Seniors Should Know and the broader Reverse Mortgage Guide.

Step-by-step checklist if you’re considering a reverse mortgage

  1. Complete HUD-approved counseling — required for HECMs and useful even if you pursue a private product. See: reverse mortgage counseling requirement.
  2. Gather documents: proof of age, mortgage statements, property tax & insurance records, and appraisal information.
  3. Get multiple lender quotes and compare APRs, total estimated closing costs, and available payment plans.
  4. Run scenarios: estimate loan balance growth, remaining equity at expected move or death, and how proceeds affect benefits.
  5. Consult a fee-only financial planner or attorney if your estate or Medicaid planning is complex.

When a reverse mortgage may be a poor choice

  • If you plan to move or sell within a few years, closing costs and interest may outweigh benefits.
  • If you have other low-cost liquidity options (cash, low-interest HELOC, or family support).
  • If preserving home equity for heirs is your main priority and the loan would significantly reduce the estate’s inheritance.

Professional perspective and closing advice

In my work advising retirees, reverse mortgages can be a powerful tool when used deliberately: to smooth income, pay for health needs, or avoid unfavorable withdrawals from taxable accounts. However, they require careful comparison with less-expensive alternatives and clear planning for long-term costs and obligations.

Before signing any reverse mortgage agreement:

  • Complete HUD counseling and read the lender’s full disclosures.
  • Ask how taking a lump sum vs a line of credit will affect your long-term estate and benefits.
  • Confirm current HUD mortgage insurance rates and program rules with your lender and HUD.

Disclaimer

This article is educational only and does not constitute personalized financial, legal, or tax advice. Your situation is unique — consult a HUD-approved counselor, a licensed lending professional, and a qualified tax or estate advisor before taking a reverse mortgage.

Sources & further reading

If you want, I can convert the step-by-step checklist into a printable worksheet or compare a sample lender estimate side-by-side.