For homeowners nearing or already in retirement, a reverse mortgage is a way to turn home equity into tax-free cash without having to sell or move out. Here’s what you need to know before you consider one.
A reverse mortgage is a loan for homeowners (typically age 62 or older) that lets you convert part of your home’s equity into cash. Instead of making monthly mortgage payments, you receive payments from the lender. These can be taken as monthly installments, a lump sum, a line of credit, or a combination of all three.
The most common type is a Home Equity Conversion Mortgage (HECM), which is backed by the Federal Housing Administration (FHA). There are also proprietary reverse mortgages from private lenders and single-purpose reverse mortgages offered by some local governments and nonprofits.
People use reverse mortgages for a variety of reasons, including:
Some people even use a reverse mortgage to buy a new primary home (a strategy called a reverse purchase).
When you get a reverse mortgage, you’re essentially borrowing against the equity you’ve built in your home over time. The process starts with a lender evaluating your home’s value and determining how much equity you can access, based on your age, interest rates, and current home value. Once approved, the loan amount is set, and you can choose how you’d like to receive the money—monthly payments, a lump sum, or a line of credit.
Unlike a traditional mortgage, you’re not making monthly payments to the lender. Instead, interest is added to your loan balance each month, and the total amount owed grows over time. The loan doesn’t need to be repaid until you sell the home, move out for more than 12 months, or pass away. At that point, the home is typically sold, and the proceeds are used to repay the loan. Anything left over goes to you or your heirs.
To qualify for a reverse mortgage, you typically need to:
Once you qualify, how much you can borrow depends on your age, your home’s value, current interest rates, and the type of loan you choose.
You don’t have to repay the reverse mortgage while you live in your home. However, the loan becomes due when you move out of the home, sell it, or pass away.
Your heirs can either repay the loan and keep the home, sell the home and use the proceeds to repay the loan, or simply turn the home over to the lender (especially if the loan balance exceeds the home’s value).
Just like a traditional mortgage, reverse mortgages are different for every borrower. But most come with fees, including:
These fees, along with accruing interest, are typically added to your loan balance over time.
A reverse mortgage can offer flexibility in retirement, but it’s not the right fit for everyone. Here’s a quick look at the pros and cons to consider.
If a reverse mortgage doesn’t feel like the right fit, there are other ways to tap into your home’s equity.
Home Equity Loan or HELOC: Lower fees and interest but require monthly payments.
Cash-Out Refinance: Replace your current mortgage with a new one and take out equity in cash.
Shared Equity Agreement: Get a lump sum in exchange for a share of future home appreciation.
A reverse mortgage can be a powerful tool, but it’s not one-size-fits-all. If you’re considering it, ask yourself:
If the answer to those questions is yes, it might be worth exploring further. Click here to find a Home Loan Specialist near you!