Understanding how reverse mortgages work

Dear Savvy Senior: What can you tell me about reverse mortgages? When my husband passed away last year my income dropped almost in half, and I’ve been struggling to keep up with my monthly living expenses. — Senior Homeowner

Dear Senior Homeowner: For retirees who own their home and want to stay living there but could use some extra cash, a reverse mortgage is a viable financial tool, but there’s a lot to consider to be sure it’s a good option for you.

Let’s start with the basics.

A reverse mortgage is a type of loan that allows older homeowners to borrow money against the equity in their house (or condo) that doesn’t have to be repaid until the homeowner dies, sells the house or moves out for at least 12 months. At that point, you or your heirs will have to pay back the loan plus accrued interest and fees (usually by selling the home), but you will never owe more than the value of your home.

It’s also important to understand that with a reverse mortgage you, not the bank, own the house, so you’re still required to pay your property taxes, homeowners insurance and upkeep. Not paying them can result in foreclosure.

To be eligible, you must be 62 or older, have at least 50 percent equity in your home and currently live there.

You will also need to undergo a financial assessment to determine whether you can afford to continue paying your property taxes and insurance. Depending on your financial situation, you may be required to put part of your loan into an escrow account to pay future bills. If the financial assessment finds that you cannot pay your insurance and taxes and have enough cash left to live on, you’ll be denied.

Loan details

More than 90 percent of all reverse mortgages offered are home equity conversion mortgages (HECM), which are FHA insured and offered through private mortgage lenders and banks. HECMs have home value limits that vary by county but cannot exceed $1,209,750 in 2025.

How much you can actually get through a reverse mortgage depends on your age (the older you are the more you can get), your home’s value and the prevailing interest rates. Generally, most people can borrow between 40 percent and 60 percent of the home’s value. To estimate how much you can borrow, use the reverse mortgage calculator at reversemortgage.org.

To receive your money, you can opt for a lump sum, a line of credit, regular monthly checks or a combination of these.

But be aware the reverse mortgages aren’t cheap. You’ll have to pay an origination fee, which is the greater of $2,500 or 2 percent of the first $200,000 of your home’s value plus 1 percent of the amount over $200,000. HECM origination fees are capped at $6,000.

You’ll also be charged an initial mortgage insurance premium, which is 2 percent of the loan amount, along with closing costs that will probably run several thousand dollars. Any amount you borrow, including these fees and insurance, accrues interest, which means your debt grows over time.

To learn more, see the National Council on Aging’s online booklet “Use Your Home to Stay at Home” at ncoa.org.

Also, because reverse mortgages are complex loans, all borrowers are required to get counseling through a HUD-approved independent counseling agency before taking one out. Most agencies charge $125 to $200. To locate one, call 800-569-4287.

Other options

If a reverse mortgage doesn’t suit you, you could tap your home equity by getting a regular home equity loan or line of credit. This type of borrowing requires you to make payments, and lenders can freeze or lower limits on lines of credit, but the borrowing costs are much lower. Or you could also sell your home and move somewhere cheaper.

Send your senior questions to: Savvy Senior, P.O. Box 5443, Norman, OK 73070, or visit SavvySenior.org.