Quick Summary

What Is a Reverse Mortgage?

A reverse mortgage lets homeowners aged 62 or older convert a portion of their home equity into cash — without selling the property or making monthly mortgage payments. The loan balance grows over time rather than shrinks, and repayment is deferred until the borrower sells the home, moves out permanently, or dies.

The defining characteristic is the non-recourse clause: the lender can never collect more than the home’s fair market value at repayment. If the loan balance exceeds the sale price, the FHA insurance fund (on government-backed loans) absorbs the loss. Heirs are not personally liable for the shortfall.

Three types exist in the U.S. market:

• Home Equity Conversion Mortgage (HECM) — FHA-insured and by far the most common, accounting for roughly 90% of reverse mortgages originated annually.
• Proprietary reverse mortgages — Private products from individual lenders, typically designed for homes that exceed the HECM lending limit or borrowers as young as 55.
• Single-purpose reverse mortgages — Offered by state and local government agencies for a specific use (usually home repair or property taxes); the most restrictive but also the least expensive.

This article focuses primarily on the HECM loan, since it is the most regulated, most available, and most commonly discussed product.

How a Reverse Mortgage Works

The lender calculates a principal limit — the maximum amount you can borrow — based on three inputs: your age (or the age of the younger spouse), the current interest rate, and your home’s appraised value (capped at the HECM lending limit). Older borrowers and lower interest rates produce higher principal limits.

You do not receive the full principal limit immediately. A mandatory 60-day waiting period applies to the first year, and certain upfront costs are deducted before disbursement. The remaining available equity is called the principal limit factor (PLF), published annually by HUD.

Payout Options

HECM borrowers choose from five disbursement structures, which cannot be changed once the loan closes (except from adjustable-rate products to a different adjustable option):

• Single lump sum (fixed rate) — The only fixed-rate option. You receive a set amount at closing. Suitable when you need a large, defined sum immediately, such as to pay off an existing mortgage.
• Term payments (adjustable rate) — Equal monthly payments for a set number of months.
• Tenure payments (adjustable rate) — Equal monthly payments for as long as the borrower remains in the home, regardless of how long that is.
• Line of credit (adjustable rate) — A standby credit line you draw from at will. Unused funds grow at the same rate as the loan’s interest rate — a unique feature covered in the Pros section.
• Modified combinations — A partial lump sum at closing plus a line of credit, or a partial lump sum plus monthly payments.

How Interest Compounds

Interest accrues monthly on the outstanding balance and is added to the loan — there are no current payments to offset it. This is the mechanic most borrowers underestimate. A $200,000 HECM balance at 7% interest grows to approximately $394,000 in 10 years and roughly $552,000 in 15 years, assuming no additional draws. That compounding directly reduces whatever equity remains for heirs or future use.

The HECM Loan: FHA’s Standard Product

The HECM is insured by the Federal Housing Administration under Title II of the National Housing Act. FHA insurance serves two functions: it protects the lender if the loan balance exceeds the property value at repayment, and it guarantees that borrowers continue receiving payments even if the lender fails.

Mandatory HUD Counseling

Every HECM applicant must complete a counseling session with a HUD-approved independent counselor before a lender may issue a case number. The session — which costs $125–$200 and can be conducted by phone — covers loan mechanics, alternatives, obligations, and the financial assessment process. Counseling is not a formality; it is a legal prerequisite.

To find an approved counselor, use the HUD Counselor Locator.

The 2025 HECM Lending Limit

FHA caps the appraised value it recognizes at $1,209,750 for 2025. Homes worth more than this amount are still eligible, but the principal limit is calculated only against the cap, not the full value. Owners of high-value homes who need access to equity beyond this threshold should evaluate proprietary reverse mortgages from private lenders.

Financial Assessment

Since 2015, HUD requires lenders to conduct a financial assessment of every HECM applicant — a process similar to a conventional mortgage underwrite. The lender evaluates income, assets, credit history, and payment behavior on property charges (taxes, insurance). Borrowers who fail the assessment are not automatically disqualified; instead, the lender may require a Life Expectancy Set-Aside (LESA) — a portion of the principal limit held in escrow to cover future property taxes and insurance.

Reverse Mortgage Eligibility Requirements

HECM eligibility is defined by both HUD regulation and lender underwriting. Meeting the minimum criteria does not guarantee approval or a favorable principal limit.

The Non-Borrowing Spouse Rule

If one spouse is under 62 at closing, they can remain on the property as an Eligible Non-Borrowing Spouse (ENBS) without being on the loan. Under HUD’s updated HECM guidelines, a qualifying non-borrowing spouse may continue living in the home after the borrowing spouse dies — without the loan becoming due — provided they meet ongoing obligations (taxes, insurance, maintenance) and the property remains their primary residence.

This protection does not restart disbursements. If the borrowing spouse was receiving monthly tenure payments, those payments stop at death. The ENBS retains the right to remain, not the right to continue drawing funds.

Property Condition

The home must pass an FHA appraisal. Properties with significant deferred maintenance — roof damage, foundation issues, lead paint in pre-1978 homes — may require repairs before or immediately after closing. The lender can hold a repair set-aside from proceeds to fund required work.

Pros of a Reverse Mortgage

No Required Monthly Mortgage Payments

The most immediate benefit for cash-strapped retirees is the elimination of monthly mortgage payments. For a homeowner carrying a $1,500/month mortgage payment on a fixed income, removing that obligation can materially improve cash flow without requiring a home sale.

Proceeds Are Not Taxable Income

The IRS classifies reverse mortgage disbursements as loan proceeds, not income. They do not appear on your tax return, do not affect Social Security benefits, and do not increase Medicare Part B premiums. However, they can affect Medicaid eligibility if funds are held in a bank account past the end of the month received — this is covered in detail under Cons.

The Line of Credit Growth Feature

The adjustable-rate line of credit option has a feature rarely explained clearly: unused funds grow at the same rate as the loan’s interest rate. If the rate is 7%, your available credit line increases by roughly 7% per year on the unused portion. A $150,000 line of credit left untouched for 10 years grows to approximately $295,000 in available credit. This makes early establishment of an HECM line of credit a legitimate financial planning tool even for homeowners who don’t need funds immediately.

Non-Recourse Guarantee

Heirs are never personally liable for a loan balance that exceeds the home’s value. They can sell the home, pay off the loan balance at 95% of appraised value (whichever is less) and keep the home, or walk away with no financial obligation. The FHA insurance fund covers any shortfall to the lender.

Flexibility of Use

HECM proceeds carry no restrictions on how they are spent. Borrowers use them to eliminate an existing mortgage, fund long-term care insurance premiums, cover healthcare costs, supplement retirement income, or delay drawing down investment portfolios during market downturns — a strategy sometimes called a coordinated withdrawal approach.

Tenure Payments Cannot Be Outlived

The tenure payment option guarantees monthly disbursements for as long as the borrower occupies the home as a primary residence, regardless of how long that is. A borrower who receives tenure payments for 30 years may receive far more than their original principal limit — the FHA insurance backstops the difference.

Cons and Real Risks

Interest Compounds Silently and Substantially

Because no payments are made, interest accrues on interest. A $300,000 balance at 7.5% becomes approximately $617,000 in 10 years and roughly $888,000 in 15 years. For many borrowers, the loan balance will eventually approach or exceed the home’s value — leaving nothing for heirs and potentially nothing for the borrower if they need to sell and downsize later.

High Upfront Costs Make Short-Term Use Inefficient

The total upfront cost on a typical HECM — origination fee, upfront mortgage insurance premium (MIP), and closing costs — commonly runs $10,000 to $20,000 or more. A borrower who takes a reverse mortgage and then moves within three to five years will have paid substantial fees for limited benefit.

Ongoing Property Obligations Can Trigger Foreclosure

The most common cause of HECM default is not debt — it’s failure to pay property taxes, homeowner’s insurance, or maintain the property. The loan agreement requires all three. If a borrower falls behind on property taxes, the lender can declare the loan due and payable. HUD data has shown that this type of technical default disproportionately affects lower-income borrowers and surviving spouses.

Medicaid Eligibility Risk

Medicaid counts liquid assets to determine eligibility for long-term care benefits. Reverse mortgage proceeds spent in the same month received are exempt. Proceeds held in a bank account at the end of the month count as an asset. A large lump-sum HECM draw can disqualify a borrower from Medicaid for months or longer, depending on state rules. Anyone who may need Medicaid-funded long-term care should consult an elder law attorney before proceeding.

Limits Housing Flexibility

The loan becomes due if the borrower moves out for more than 12 consecutive months — including for an extended assisted living or nursing home stay. If the borrower’s health deteriorates to the point of requiring long-term institutional care, the reverse mortgage forces a home sale at a potentially inconvenient time.

Heirs Receive a More Complex Estate

Heirs typically have 30 days after the borrower’s death (extendable to 12 months with lender approval) to sell or pay off the loan. Estates going through probate often take longer, creating timing pressure. Some heirs choose to let the home go rather than navigate the process, even when residual equity remains.

Proprietary Products Carry Less Regulation

Non-HECM proprietary reverse mortgages are not subject to FHA counseling requirements, financial assessments, or the non-borrowing spouse protections described above. Borrowers considering a proprietary product should apply those standards themselves through independent legal and financial review.

Costs and Fees: The Full Picture

Reverse mortgage costs are substantially higher than conventional mortgage costs. Lenders are required to disclose a Total Annual Loan Cost (TALC) rate, which expresses the full cost as an annualized percentage across multiple time horizons. Pay close attention to the short-term TALC rate — it is typically very high, reflecting how front-loaded these fees are.

Most costs can be financed into the loan rather than paid at closing, which reduces out-of-pocket expense but increases the compounding balance from day one.

The Interest Rate

Fixed-rate HECMs are only available as lump-sum products. Adjustable-rate HECMs — which allow line of credit, tenure, and term options — use a margin (set by the lender, typically 1.5%–3%) added to an index (usually the one-year Constant Maturity Treasury or the Secured Overnight Financing Rate). Total rates as of early 2026 have ranged from 6.5% to 8.5% depending on product and lender. The interest rate directly determines both the loan’s growth rate and the size of the available credit line.

Alternatives Worth Comparing

A HELOC is often the lower-cost solution for borrowers who have retirement income sufficient to cover interest payments. The HECM becomes more competitive when the borrower has no income to service a HELOC, plans to remain in the home long-term, or wants to exploit the line-of-credit growth feature as a longevity hedge.

Who Should—and Shouldn’t—Use One

Strong Candidates

• Homeowners 70 or older with substantial equity, no desire to move, and a gap between fixed retirement income and living expenses.
• Retirees with investment portfolios who want to establish an HECM line of credit as a buffer — drawing from it during market downturns to avoid selling equities at a loss.
• Borrowers with an existing mortgage whose monthly payment is causing financial strain and who qualify to pay it off entirely with HECM proceeds.
• Homeowners who want to purchase a new primary residence using the HECM for Purchase (H4P) program, which combines a down payment with HECM proceeds to buy a home with no monthly mortgage payment.

Poor Candidates

• Homeowners who may need to move within five years — high upfront costs make short-term use financially inefficient.
• Anyone whose primary goal is to preserve equity for heirs — compounding interest will erode the estate significantly over time.
• Borrowers who struggle with property tax and insurance payments — the ongoing obligations are non-negotiable and failure triggers default.
• Individuals who may need Medicaid-funded long-term care within the next several years, unless structured carefully with elder law guidance.
• Homeowners who can qualify for and service a HELOC — the HELOC will almost certainly be the lower-cost path.

Frequently Asked Questions

Loan Basics and Repayment

Can you lose your home with a reverse mortgage?

Yes — but the risk is not a growing loan balance. The loan balance alone will never force you out, because no repayment is required while you live in the home. Foreclosure happens when a borrower fails to pay property taxes, maintain homeowners insurance, or keep the home in reasonable condition. All three are contractual obligations. Meet them, and the lender has no grounds to demand repayment.

When does a reverse mortgage become due?

The loan is triggered by one of four events: the borrower sells the home, the borrower moves out for more than 12 consecutive months (including an extended nursing home stay), the last borrower on the loan dies, or the borrower defaults on property obligations. There is no maturity date — the loan can remain open indefinitely as long as the borrower lives in the home and meets their obligations.

What happens to the loan when the borrower dies?

The loan becomes due and payable. Heirs have 30 days from notification — extendable to up to 12 months — to choose one of three paths: sell the home and use the proceeds to repay the outstanding balance; pay off the loan at the lesser of the balance or 95% of the current appraised value and keep the home; or deed the property to the lender and walk away. If the home is worth less than the outstanding balance, heirs owe nothing beyond the property itself. The FHA insurance fund absorbs the shortfall.

Money, Taxes, and Benefits

How much can you borrow with a reverse mortgage?

The amount — called the principal limit — depends on your age, the current interest rate, and your home’s appraised value (capped at the 2025 HECM lending limit of $1,209,750). The older you are and the lower the rate, the higher your limit. As a general benchmark, a 75-year-old with a $500,000 home in a moderate-rate environment might access roughly 45%–55% of appraised value after costs are deducted. A HUD-approved counselor can give you a personalized estimate before you apply.

Does a reverse mortgage affect Social Security, Medicare, or Medicaid?

Social Security and Medicare are not affected. The IRS treats HECM disbursements as loan proceeds — not income — so they do not appear on your tax return, do not alter Social Security benefit calculations, and do not trigger higher Medicare Part B premiums.

Medicaid is a different matter. Proceeds held in a bank account at the end of the calendar month they are received count as a liquid asset for Medicaid eligibility purposes. A large lump-sum draw can temporarily disqualify a borrower from Medicaid-funded long-term care. Anyone who anticipates needing Medicaid within the next several years should consult an elder law attorney before drawing funds.

Is reverse mortgage interest tax-deductible?

Not in real time. Because interest accrues but is never paid currently, no deduction is available on an annual basis. The deduction is deferred: when the loan is eventually repaid — by the borrower, through a sale, or by heirs — the accumulated interest paid at that point may qualify under standard mortgage interest deduction rules, subject to current IRS limits. The rules are nuanced and depend on how the proceeds were used. Consult a CPA before assuming deductibility.

Refinancing and Long-Term Planning

Can a reverse mortgage be refinanced?

Yes. If your home has appreciated significantly or interest rates have dropped since origination, refinancing into a new HECM may unlock a larger principal limit. HUD requires the net increase in available funds to exceed five times the cost of refinancing — a built-in protection against unnecessary fee cycling. The upfront MIP you paid on the original loan is credited toward the new premium, reducing the cost of refinancing.

Is the HECM line of credit a good financial planning tool even if you don’t need funds now?

For some retirees, yes. The unused portion of an adjustable-rate HECM line of credit grows at the same rate as the loan’s interest rate — meaning the available credit compounds over time whether or not you draw from it. A $150,000 credit line established at 62 and left untouched for a decade grows to roughly $295,000 in available capacity (at 7%). Financial planners sometimes recommend establishing the line early as a longevity hedge or market-downturn buffer, drawing from it only when investment portfolios are down to avoid locking in losses on equity sales.