What is a Reverse Mortgage? An Unbiased Insider Explains What You Need to Know in 2023

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What is a reverse mortgage? How does it really work? Is it right (or wrong) for you? An experienced industry veteran and published author explains how a reverse mortgage really works.

I’ve helped many seniors get reverse mortgages over the years, including a very close relative. I’ve also published a book about reverse mortgages. I’m a big fan of the reverse mortgage, but I’m not here to try and sell you one. My goal is to give you an unbiased rundown of the reverse mortgage basics.

I can tell you right now that much of what you’ve heard about reverse mortgages is either dated or simply not true. Rumors and misconceptions are rampant.

You’ve probably heard that you give up ownership of your home and that reverse mortgage interest rates are sky high. You’ve probably also heard that reverse mortgages are only a last resort for the broke and desperate.

Are these rumors actually true?

In this guide, we’ll separate fact from fiction so you can decide if a reverse mortgage is potentially right for you. Here’s the reverse mortgage explained by an industry veteran in simple and understandable terms.

What is a Reverse Mortgage?

So, what is a reverse mortgage? A reverse mortgage is a unique home loan designed to give you access to a portion of your home’s value without a mortgage payment and without giving up ownership of your home.

The most popular reverse mortgage in America is the home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders). If you know somebody who got a reverse mortgage, it likely was a HECM.

Congress created the HECM as part of the Housing and Community Development Act of 1987, which was signed into law by President Reagan. 

HECM reverse mortgages are funded by private lenders, but insured and regulated by the Federal Housing Administration (FHA).

The minimum qualifying age for a HECM is 62. If you’re married, only one of you needs to be at least 62. The younger spouse can qualify as a non-borrowing spouse.

What is a reverse mortgage? A reverse mortgage is a unique home loan designed to give you access to a portion of your home’s value without a mortgage payment and without giving up ownership of your home.

How A Reverse Mortgage Works

So, how does a reverse mortgage work? First of all, it’s the opposite of what you’re used to. With a traditional “forward” mortgage, you borrow a large amount and pay it back on a monthly basis over time. Your loan balance decreases and your home equity increases over time.

A reverse mortgage works in the opposite direction. You borrow over time and pay it back in one lump sum when you’re no longer living in the home. You convert home equity into cash that you can use to fund your retirement.

No mortgage payments are required as long as at least one borrower (or non-borrowing spouse) lives in the home and pays the property charges. The loan becomes due and payable when the last borrower or non-borrowing spouse permanently leaves the home.

You remain the owner of your home and you’re free to leave it to your heirs. Your heirs can keep the home by paying off or refinancing the reverse mortgage balance. If your heirs don’t want the home, they can sell it, repay the reverse mortgage, and keep the remaining equity.

Your heirs can also let the lender sell it if they don’t want to keep the home or mess with selling it.

The HECM is a non-recourse loan, which means the most that will have to be repaid is the value of your home. FHA covers the shortage if your home isn’t worth enough to pay off the entire balance.

What Are the 3 Types of Reverse Mortgages?

There are three types of reverse mortgages on the market, single-purpose, federally-insured, and proprietary:

  • Single-purpose reverse mortgages: These are offered by state, local, and nonprofit agencies. These types of reverse mortgages are rare.
  • Federally-insured: The HECM is the only federally-insured reverse mortgage. It’s backed regulated and insured by the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA).
  • Proprietary reverse mortgages: These are also called “jumbo” reverse mortgages because they’re designed for homeowners with home values of $1 million or more. Proprietary reverse mortgages are not backed by the FHA.

In all the years I’ve worked in the reverse mortgage industry, I’ve never run across a single-purpose reverse mortgage. You’ll likely never hear about them. The most common reverse mortgage by far is the HECM.

Why Get a Reverse Mortgage?

What is a reverse mortgage best used for? Why would someone use a reverse mortgage? As it turns out, there are a lot of reasons!

The HECM is highly flexible and customizable, which means it can be used for a lot of different things. Proceeds can be taken as a lump sumline of creditterm/tenure income, or some combination of all of these options.

You can use the proceeds for whatever you like, including:

  • Eliminate existing mortgage payments
  • Eliminate consumer debt payments (credit cards, auto loans, personal loans, etc.)
  • Pay for medical bills
  • Finance home improvements
  • Supplement retirement income
  • Supplement retirement assets
  • Rainy day or emergency fund

What is a reverse mortgage used for the most? The most common reasons people get reverse mortgages is to eliminate existing mortgage payments, do home improvements, supplement liquid assets, and pay off consumer debt.

Reverse Mortgage Costs

What is a reverse mortgage going to cost? What are the upfront costs and the ongoing costs? Great questions! Reverse mortgage costs fall into two buckets: interest and closing costs.

Reverse Mortgage Interest and MIP

How does interest work on a reverse mortgage? First of all, a reverse mortgage is a home loan, so it comes with an interest rate. Interest rates are usually comparable to traditional “forward” mortgage rates.

The interest is calculated the same as any other type of home loan: it accrues monthly based on an annual percentage rate.

The difference, of course, is that you don’t have to make payments on the interest (or the principal for that matter). Any unpaid interest simply accrues onto the loan balance over time. Your home equity pays the mortgage “payment” so you don’t have to make a mortgage payment out of your pocket.

FHA also assesses it’s own mortgage insurance premium on top of the initial interest rate. This premium, which is called annual mortgage insurance premium (MIP), works just like the initial interest rate. It’s based on an annual rate with accruals on a monthly basis.

The annual mortgage insurance premium is important because it helps make the HECM non recourse.

Reverse Mortgage Closing Costs

Like any home loan, a reverse mortgage typically has closing costs. The closing costs typically aren’t cheap, which is why they’re one of the most common objections to a rev. Reverse mortgage closing costs generally fall into three categories:

  • Third party costs: These are the services the lender has to hire to get your reverse mortgage done. Such services include title insurance, escrow, appraisal, government recording, attorney fees, etc.
  • Origination: Lenders often charge origination fees to cover the costs associated with processing and completing your reverse mortgage.
  • Initial mortgage insurance premium (IMIP): This is a one-time fee charged by FHA at closing. FHA uses IMIP premiums to insure the reverse mortgage and make it non recourse. IMIP premiums also help FHA guarantee the reverse mortgage funds even if your lender goes out of business.

Whether the closing costs are cheap or not, they’re usually not paid out of pocket. Most or all can usually be rolled into the new loan.

The exception is a reverse mortgage for purchase. If you’re buying a home with a reverse mortgage, the closing costs are paid out of pocket as part of your cash to close.

Qualifying for a Reverse Mortgage

Years ago, there were very few requirements to get a reverse mortgage. FHA has since implemented new qualifying guidelines that take into account credit and income.

This is why a reverse mortgage is not a loan of last resort for the broke and desperate. You have to qualify – and frankly, the broke and desperate often don’t qualify.

A reverse mortgage is best suited for those who are at least reasonably financially stable.

The lending guidelines are tighter today than in the past, but it’s still relatively easy to get a reverse mortgage. You don’t need to have a lot of income and you don’t need to have perfect credit. In fact, lenders don’t even care about your credit scores.

Lenders are mainly concerned with the following:

  • Payment histories on debts and property charges: It’s OK to have a few lates here and there as long as there aren’t too many of them. Property charges need to be paid on time, however.
  • Residual income: Your lender wants you have to a certain amount of income left over at the end of the month after paying your property charges, debt payments, and estimated utilities.

If you’re not able to meet the payment history or residual income requirements, lenders have leeway to disregard with certain compensating factors or extenuating circumstances.

If you don’t have any valid compensating factors or extenuating circumstances, you may still qualify with a life expectancy set-aside (LESA).

How Much Can I Get?

How much money do you get from a reverse mortgage? The answer to that question depends on a few different factors, including your home’s value, current interest rates, how the reverse mortgage is structured, and the age of the youngest borrower or non-borrowing spouse. There is no set amount that applies to every homeowner.

Older homeowners tend to qualify for more than younger homeowners. The reverse mortgage also tends to offer more when interest rates are lower versus when rates are higher.

If you’d like to estimate how much you get from a reverse mortgage, check out the links below.

How much money do you get from a reverse mortgage? If you’d like to estimate how much you can get from a reverse mortgage, check out our reverse mortgage calculator. Purchasing a home? Check out our reverse mortgage for purchase calculator.

What is a reverse mortgage? Check out a simple reverse mortgage explanation in The Reverse Mortgage Explained.

Who owns the house in a reverse mortgage?

You always retain title ownership of your home. It’s a common misconception that the bank owns the home.

Can you lose your house with a reverse mortgage?

You obligation is to live in your home, maintain it like normal, and pay your property taxes, homeowner’s insurance, and HOA dues (if applicable). If you do these things, it’s very difficult to lose your home.

Can I reverse my reverse mortgage?

Yes, you can pay off or refinance a reverse mortgage at any time. There is no prepayment penalty and no limitations on selling your home.

Can you owe more than the home is worth with a reverse mortgage?

It’s possible that the loan balance can exceed the home value if home values fall. However, FHA covers the shortage. You or your heirs will never have to repay any more than the value of the home.

When do you have to repay a reverse mortgage?

A reverse mortgage doesn’t have to be repaid until the last borrower or non-borrowing spouse no longer lives in the home and pays the property charges.

Why would someone do a reverse mortgage?

Many people take advantage of a reverse mortgage to eliminate existing mortgage or consumer debt payments, do home improvements, pay for medical bills, supplement income or retirement assets, or plan for future end of life or long term care expenses.

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