What Is a Reverse Mortgage?

The Three Types of Reverse Mortgages

Reverse mortgages come in three categories. The CFPB names them as loans insured by the Federal Housing Administration, proprietary loans that are not FHA-insured, and single-purpose loans offered by state and local governments.

Home Equity Conversion Mortgage (HECM). This is the federally insured type. The FHA, part of the U.S. Department of Housing and Urban Development (HUD), insures it. HUD states that the HECM is "the only reverse mortgage insured by the U.S. Federal Government" and is available only through an FHA-approved lender. The CFPB says most reverse mortgages today are HECMs. The federal statute's protections, including mandatory independent counseling, are written for this type.

Proprietary reverse mortgage. This is a private loan offered by some lenders. It is not insured by the federal government. The CFPB says these loans are "typically designed for borrowers with higher home values."

Single-purpose reverse mortgage. Some state and local governments and nonprofits offer these loans. The CFPB says they may be used only for the purpose the lender sets, such as home repairs or property taxes. They may be offered only in some areas, sometimes only to homeowners with low to moderate income, and they are not federally insured.

The rest of this guide focuses on the HECM, because federal law spells out its rules.

Who Can Get a HECM and What the Home Must Be

Eligibility starts with age. The statute 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)). HUD's regulation adds that "The youngest borrower shall be 62 years of age or older at the time of loan closing" (24 C.F.R. § 206.33).

The home must be the principal residence. A principal residence is the home where the person lives most of the year, as the CFPB puts it. HUD's rule says it must be the principal residence of each borrower, and of any Eligible Non-Borrowing Spouse, at closing (24 C.F.R. § 206.39). An Eligible Non-Borrowing Spouse is a spouse who is not on the loan as a borrower but who meets HUD's conditions. That status matters later, when the loan would otherwise come due.

The property must be an eligible type. The statute requires a dwelling designed mainly as a 1- to 4-family residence, with the borrower living in one of the units. It also allows certain cooperative and long-term leasehold interests. The home must meet FHA property standards, and HUD publishes the full list of allowed property types.

An existing mortgage must be paid off. The CFPB says any existing mortgage balance must be paid off at closing, using the borrower's own funds or the reverse mortgage. A borrower also cannot owe federal debt, such as federal income taxes or student loans, although the loan may be used to pay that debt off.

Counseling comes first. The borrower must receive counseling from an independent third party. That counselor may not be connected to, or paid by, anyone who originates or funds the loan or who sells annuities, investments, insurance, or other financial products. The counselor's role is to inform the homeowner, not to make a sale.

The ability to pay property charges is reviewed. Federal law lets HUD add requirements. As part of the process, the lender reviews whether the borrower can keep up with property taxes and insurance. This review is called a financial assessment. In plain terms, it is a look at whether the borrower is likely to keep meeting the property-charge duties that keep the loan in good standing. A counselor can explain what it looks at.

Meeting these points describes who may apply. It does not mean any particular homeowner will be approved.

How You Receive the Money and What Shapes the Amount

How much may be available depends on several factors. The CFPB says the borrowing limit, called the "principal limit," depends on the borrower's age, the loan's interest rate, and the home's value. For couples, it is based on the age of the youngest borrower or Eligible Non-Borrowing Spouse. HUD also points to "the lesser of appraised value or the HECM FHA mortgage limit or the sales price." HUD publishes the current limit.

The statute lets the borrower choose how payments arrive (12 U.S.C. § 1715z-20(d)(9)). The choices are:

• a line of credit;
• monthly payments over a term the borrower picks;
• term payments combined with a line of credit;
• monthly payments over the borrower's tenure;
• tenure payments combined with a line of credit;
• any other basis HUD considers appropriate.

A line of credit is a pool of money the borrower draws from only when needed. A term payment is a fixed monthly amount for a set number of years. A tenure payment is a fixed monthly amount for as long as the borrower keeps the loan, as long as the payout does not push the balance past the amount stated in the mortgage. The CFPB also describes a lump sum, which takes all available funds at once and may be a smaller amount than other options provide.

The CFPB notes that the unused part of a HECM line of credit "will keep growing," up to the maximum stated in the mortgage. That growth means more room to borrow. It is not interest earned.

Borrowers may generally switch payment methods during the loan. For a fixed-rate loan, however, the statute lets HUD limit that switching. The rate type and the payout choice are linked, and no single choice suits every household.

What a Reverse Mortgage Costs

The costs are easier to follow when sorted by who receives them. They generally include:

• an origination fee paid to the lender;
• a mortgage insurance premium (MIP) paid to FHA, both upfront and yearly;
• third-party closing costs such as the appraisal and title;
• servicing charges;
• the interest that accrues on the balance.

What mortgage insurance does. The MIP pays for a federal backstop on both sides of the loan. If the party responsible for paying the borrower defaults, HUD must step in to provide the funds the borrower is owed. HUD must also provide the lender the funds it is entitled to under the insured mortgage, within the statute's limits (12 U.S.C. § 1715z-20(i)(1)).

Current premium rates. In Mortgagee Letter 2017-12, HUD set the initial MIP at 2.00% of the maximum claim amount and the annual MIP at 0.50% of the outstanding balance. Those rates apply to HECMs with FHA case numbers assigned on or after October 2, 2017. HUD sets both premium rates and principal limit factors through mortgagee letters and announces any later changes the same way, so the figures above reflect that letter and may not be the rates in effect for a given loan.

The fee limit. Federal law requires HUD to set limits on the origination fee a lender may charge, and the fee may be fully financed into the loan (12 U.S.C. § 1715z-20(r)). A limit is a ceiling, not the fee a borrower is charged. Before signing, the borrower must receive full disclosure of all costs charged, including which charges are required to get the loan and which are not (12 U.S.C. § 1715z-20(d)(2)(C)).

Because charges accrue, the total cost depends on how long the loan runs and how much is drawn. The longer the loan lasts, the more the balance grows. Before closing, the lender must give a projected total cost for at least two loan terms, including a short term and one matching the borrower's life expectancy.

The Ongoing Obligations and What Happens If They Are Not Met

Ads promising "no payments" often leave this part out. The loan stays in good standing only while the borrower's duties are kept, among them living in the home as a principal residence, paying property taxes, keeping homeowners insurance, and keeping the home in good repair.

When the loan becomes due. Due and payable means the full balance must be repaid. Under HUD's rule, this happens when a borrower dies and the home is not the principal residence of at least one surviving borrower, subject to a deferral for an Eligible Non-Borrowing Spouse. It also happens when a borrower conveys all title and no other borrower keeps title (24 C.F.R. § 206.27(c)).

The spouse deferral in plain terms. The deferral means the due date is postponed, not cancelled, for a qualifying spouse who was not a borrower. Under the same rule, the postponement lasts until the last Eligible Non-Borrowing Spouse dies or until HUD's conditions for the deferral stop being met and are not cured. During that time, the spouse can generally remain in the home. The CFPB notes that an Eligible Non-Borrowing Spouse does not receive money from the reverse mortgage.

Other events, with HUD's approval. The loan can also become due when:

• the home stops being a borrower's principal residence for reasons other than death, and it is not the principal residence of at least one other borrower;
• for longer than 12 consecutive months, a borrower does not live in the home because of physical or mental illness, and it is not the principal residence of at least one other borrower;
• the borrower does not provide for paying property charges;
• an obligation of the borrower under the mortgage is not performed.

Repayment and heirs. When the loan comes due, the CFPB explains that it is usually repaid by selling the home. Heirs who want to keep the home can repay the loan instead. There is a period to arrange this, and the servicer's notice gives the timing.

Non-recourse protection. Non-recourse means the debt is limited to the home. The statute says the homeowner is not liable for any shortfall between the balance and what the lender recovers from the net sale proceeds or the insurance benefits (12 U.S.C. § 1715z-20(d)(7)).

Other Ways to Access Home Equity and How They Compare

For a homeowner who needs money, the comparison comes down to which trade-off fits. Each option gives up something.

A home equity loan or line of credit (HELOC) borrows against the home with monthly payments and credit approval.

A cash-out refinance replaces the current mortgage with a larger one. It brings a new monthly payment.

Selling or downsizing can free up more of the equity, without a growing loan balance. It means leaving the home.

Property tax relief and benefits programs are targeted help, not a general source of cash. The CFPB points to state and local programs for utilities, repairs, and property taxes, and suggests checking with the county tax office.

Help from family keeps a lender out of it, but it depends on the family's means and on clear agreements.

A reverse mortgage trades future equity for money now, with no monthly loan payment. As the FTC puts it, it "increases your debt and can use up your equity." It is a loan, not income, a gift, or a government benefit. Counselors are required to discuss these alternatives, and the borrower's own situation decides which one fits.