Reverse Mortgage Pros, Cons and Risks

The Three Types of Reverse Mortgages

Three broad categories of reverse mortgage exist, and they work differently.

Home Equity Conversion Mortgage (HECM). The HECM is insured by the Federal Housing Administration and governed by HUD's rules. Federal law defines an eligible homeowner as one "who is, or whose spouse is, at least 62 years of age or such higher age as the Secretary may prescribe" (12 U.S.C. § 1715z-20(b)(1)). The CFPB calls the HECM "the most common type of reverse mortgage."

Proprietary reverse mortgages. These are private loans that the Federal Housing Administration does not insure. Their terms, costs and protections are set by the lender and the loan contract rather than by the HECM program, and the FTC notes that some lenders offering them also require counseling.

Single-purpose reverse mortgages. Some state and local government agencies and nonprofit groups offer reverse mortgages limited to one use, such as home repairs or property taxes. Their rules vary by program.

The HECM rules and protections on this page apply to HECMs specifically. A proprietary or single-purpose loan has its own terms, and its documents are where those terms are found.

How the Money Can Be Received

A HECM borrower has real choice in how the money arrives. Federal law lets the borrower pick a payout method, under the loan's terms and subject to the lender's approval, with payments "based on accumulated equity (minus any applicable fees and charges)." In everyday terms, the options listed in 12 U.S.C. § 1715z-20(d)(9) come down to a few shapes:

• Draw as needed. A line of credit lets the borrower take money when it is wanted.
• A steady monthly amount for a chosen period. The borrower picks the number of months.
• A steady monthly amount for as long as the borrower stays. This is called tenure: payments continue while the borrower lives in the home as a principal residence and keeps up the loan's obligations.
• A mix. Either kind of monthly payment can be combined with a line of credit.
• "Any other basis that the Secretary considers appropriate."

A single lump sum at closing is another way funds may be taken, and it is generally tied to a fixed interest rate. A borrower who later wants a different arrangement may generally switch payment methods during the loan, though for a fixed-rate loan, the statute lets HUD limit that switching (12 U.S.C. § 1715z-20(d)(10)). A counselor or lender can explain which options a specific loan allows.

How much may be available is set by HUD's formula, and HUD says it depends on the age of the youngest borrower or eligible non-borrowing spouse, the current interest rate, and the lesser of the appraised value, the HECM FHA mortgage limit, or the sales price. Any existing mortgage must also be paid off at closing, which reduces what remains. The factors behind how much a reverse mortgage provides are worth understanding before looking at any number. A reverse mortgage calculator gives only a hypothetical illustration, not an offer, and the next educational step after one is a counseling session.

The Pros: What a Reverse Mortgage Could Do for Your Household

For a homeowner who wants to stay put, the appeal is easy to see. A reverse mortgage can turn part of the home's value into cash without selling the house and without a monthly loan payment.

Flexible use of the money. HUD says a HECM lets a borrower withdraw a portion of equity "to use for home maintenance, repairs, or general living expenses." Congress wrote the program to help older homeowners with "the increasing costs of meeting health, housing, and subsistence needs at a time of reduced income" (12 U.S.C. § 1715z-20(a)(1)).

A limit on what is owed. A HECM is non-recourse, meaning the borrower is not personally liable for any shortfall. The statute says the homeowner "shall not be liable for any difference" between the remaining debt and what the lender recovers from the net sale proceeds or the insurance benefits (12 U.S.C. § 1715z-20(d)(7)). The CFPB puts it plainly: "neither you nor your heirs will have to pay back more than your home is worth." One caution belongs alongside this: the non-recourse feature limits the debt, not the risk of losing the home. If the loan's obligations go unmet, the loan can still come due, as the Cons section below explains.

Remaining equity stays in the family. If the home sells for more than the loan balance, the difference belongs to the borrower or the heirs.

Prepayment without penalty. A HECM must allow prepayment "in whole or in part" without penalty at any time (12 U.S.C. § 1715z-20(d)(4)).

A required counseling step. Before a HECM closes, the borrower meets an independent counselor. That session exists to protect the borrower, and it is described more fully below.

None of these advantages makes a reverse mortgage the answer for every household. They are reasons to weigh it alongside the alternatives.

The Cons and Risks: What a Reverse Mortgage Costs and Trades Away

The other side of the ledger matters most before any decision, and it starts with cost. The CFPB says "a reverse mortgage loan is more expensive than other home loans," typically.

A growing balance. Because interest and fees build on the balance, the FTC warns that this "can use up much – or even all ─ of your equity" (FTC). Less equity remains for later needs or for heirs.

Upfront costs. The CFPB's cost page lists an origination fee paid to the lender, closing costs paid to third parties (such as an appraisal, title search and recording fees), and an initial mortgage insurance premium paid to the Federal Housing Administration. Federal rules limit the origination fee, and the lender discloses it. For HECMs with FHA case numbers assigned on or after October 2, 2017, HUD set the initial premium at 2.00% of the maximum claim amount and the annual premium at 0.50% of the outstanding balance (HUD Mortgagee Letter 2017-12). Costs paid from the loan mean less money available to the borrower.

Ongoing duties. Taxes, insurance and upkeep remain the borrower's responsibility. The CFPB warns that a borrower "could face foreclosure if you run out of money to pay property taxes, insurance, or other housing-related expenses."

Events that make the loan due. Under 24 C.F.R. § 206.27(c)(2), the balance can become due, with HUD's approval, if the home stops being a borrower's principal residence for reasons other than death and no other borrower lives there; if, for more than 12 consecutive months, a borrower is away because of physical or mental illness and no other borrower lives there; if the borrower does not pay property charges as required; or if another obligation under the mortgage is not performed. A long stay in a nursing home or assisted living can trigger this. This is the risk the non-recourse limit described in the Pros section does not cover.

Heirs and the house. Heirs who want to keep the home must repay the balance, often by refinancing. Otherwise, the CFPB says, the loan is "usually" repaid by selling the home.

A short stay. The CFPB calls a reverse mortgage "an expensive way to cover short term cash needs" for someone who may move soon, because upfront costs may not be recovered.

Is a Reverse Mortgage a Fit for Your Household?

Whether a reverse mortgage fits is a question of the household's facts, not a test to pass. These are factors to weigh, and a reverse mortgage is not the right fit for every homeowner.

Factors that tend to make it worth exploring include an older borrower, a plan to stay in the home for many years, a fixed income that needs support or a specific expense to cover, and substantial equity. Age plays a direct role: the CFPB notes that "the older a borrower is, the more money he or she can borrow," and that a borrower who starts too young "may run out of money when you're older and need it more."

Factors that tend to make it a poor fit include a likely move in the near future, a strong wish to leave as much equity as possible to heirs, and difficulty keeping up with property taxes and insurance now.

Another resident can be a serious risk. If a spouse is not on the loan, protection depends on whether that spouse qualifies under HUD's rules as an Eligible Non-Borrowing Spouse. For one who qualifies, the mortgage must defer the due date through a "Deferral Period" until that spouse dies or stops meeting its requirements (24 C.F.R. § 206.27(c)(3)). For a spouse who does not qualify, or for a relative or caregiver living in the home, the picture is harder. The CFPB says that after a borrower's long absence, "anyone living with you will have to move out unless they are able to pay back the loan or qualify as an Eligible Non-Borrowing Spouse."

For a family thinking about a parent and a spouse who share the home, this decision deserves careful thought and independent counseling.

Alternatives Worth Knowing About

A reverse mortgage is one of several ways to meet a money need tied to the house. Each alternative trades something different.

Home equity loan or HELOC. A home equity loan is a lump sum borrowed against the home and repaid monthly. A HELOC is a line of credit against the home, also repaid. The CFPB says these "might be a cheaper way to borrow cash against your equity," but they "usually have monthly payments" and depend on income and credit.

Cash-out refinance. A new, larger mortgage replaces the old one, and the homeowner takes the difference in cash. Monthly payments continue.

Selling or downsizing. Selling frees the equity entirely. The trade is the home itself, along with moving costs and a new place to live.

Property tax relief. Some states and localities offer property tax deferral or exemption programs for older homeowners. The CFPB suggests checking with the county or town tax office.

Help from family. A loan, shared costs or a family member moving in can help. These arrangements carry their own legal, tax and relationship questions, and putting the terms in writing is a common way to keep them clear.

A benefits check. An older homeowner may be eligible for help with utilities, fuel or home repairs that they are not yet receiving. The CFPB points to benefitscheckup.org as a place to look (CFPB).

None of these is better in every case, and a reverse mortgage is not better than them in every case.

The Required Counseling Step: A Protection Worth Understanding

What happens in counseling is often the part families know least about, and it is a protection worth understanding. Before a HECM can be insured, the borrower must receive "adequate counseling" from "an independent third party" that is not associated with or paid by anyone involved in originating, servicing or funding the loan, or in selling annuities, investments, long-term care insurance or other financial or insurance products (12 U.S.C. § 1715z-20(d)(2)(B)). Put simply, the counselor is there for the borrower's understanding, not the lender's sale.

The conversation is meant to cover the whole picture, not just the loan. The law requires the counselor to discuss information that includes:

• options other than a HECM, "including other housing, social service, health, and financial options";
• other home equity conversion options, "such as sale-leaseback financing, deferred payment loans, and property tax deferral";
• the financial implications of the loan;
• a disclosure that a HECM "may have tax consequences, affect eligibility for assistance under Federal and State programs, and have an impact on the estate and heirs"; and
• any other information HUD requires (12 U.S.C. § 1715z-20(f)).

The CFPB adds that counselors may charge a reasonable fee, cannot charge one a borrower cannot afford, and must explain charges first. HUD's page directs readers to its HECM Counselor Roster or to call (800) 569-4287. The FTC also notes that no one has to buy other financial products to get a reverse mortgage. More on HUD reverse mortgage counseling is available on this site.