For many homeowners approaching retirement, their home is one of their most valuable financial assets. But having substantial home equity doesn't necessarily make it easier to cover everyday expenses.
A reverse mortgage may allow eligible homeowners age 62 and older to access a portion of that equity while continuing to live in their home.
Not all reverse mortgages are the same. Interest rates, fees, loan options, and available proceeds can vary, making it important to compare your choices before selecting a lender.
Here's what homeowners should know before getting started.
A reverse mortgage is a type of home loan designed primarily for older homeowners.
The most common type is the Home Equity Conversion Mortgage (HECM), which is available to qualifying homeowners age 62 and older.
Instead of making required monthly mortgage payments to a lender, eligible homeowners can receive proceeds from their home's equity. Interest and fees are added to the loan balance over time, so the amount owed generally increases rather than decreases.
Depending on the loan and borrower, proceeds may be available as:
The homeowner keeps title to the property.
However, homeowners are still responsible for property taxes, homeowners insurance, maintenance and other applicable property expenses. The home must also generally remain the borrower's primary residence.
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A reverse mortgage isn't simply about getting cash from a house.
For some homeowners, it can be a way to make the equity they've accumulated over many years more useful during retirement.
Homeowners may consider using the proceeds to:
Because reverse mortgage proceeds are loan proceeds rather than income, they're generally not treated as taxable income.
Reverse mortgages can have different interest rates, lender fees, available proceeds and product features.
That's why homeowners shouldn't necessarily accept the first reverse mortgage offer they receive.
When comparing options, pay particular attention to these five areas.
The amount available isn't simply based on the total value of your house.
For an FHA-insured HECM, factors can include your age, current interest rates, the home's value and applicable lending limits.
Two homeowners with similarly valued properties could therefore receive different estimates.
Even though a reverse mortgage generally doesn't require monthly principal-and-interest mortgage payments, interest still accumulates.
That means the interest rate can have a meaningful impact on how quickly the loan balance grows.
Comparing lenders may help homeowners identify more competitive terms.
Reverse mortgages can include expenses such as:
HECM loans also include FHA mortgage insurance.
Ask each lender to clearly explain the total estimated costs rather than focusing only on the amount of money available.
Depending on the reverse mortgage selected, homeowners may have several ways to access their funds.
Someone looking for an emergency reserve might prefer a line of credit, while another homeowner may want predictable monthly distributions.
The right structure depends on how you expect to use the money.
Reverse mortgages have more specialized rules than many traditional mortgages.
When comparing lenders, consider factors such as product availability, rates, costs, reputation, geographic availability and customer service.
Finding an experienced reverse mortgage lender can be especially valuable when you're trying to understand your choices.
Compare available options based on your age, home and financial situation.
There are several reasons eligible homeowners explore reverse mortgages
✓No required monthly mortgage payments
Borrowers generally aren't required to make monthly principal-and-interest mortgage payments while they meet the loan's requirements.
✓Stay in your home
The homeowner retains title and can continue living in the property.
✓Access accumulated home equity
Homeowners can turn a portion of an otherwise illiquid asset into funds they can use.
✓Flexible ways to receive proceeds
Depending on the type of reverse mortgage, options may include monthly distributions, a line of credit or a lump sum.
✓HECM borrower protections
HECMs include federal requirements and borrower protections, and applicants must complete counseling with a HUD-approved reverse mortgage counseling agency before obtaining the loan.
There are also important tradeoffs
✕Your loan balance generally grows
Interest and applicable fees are added to the balance rather than being paid down each month.
✕Your home equity decreases
Using home equity today generally means leaving less equity in the property later.
✕You still have homeowner expenses
Property taxes, homeowners insurance and home maintenance remain your responsibility.
Failing to meet these obligations can cause the loan to become due and potentially place the home at risk of foreclosure.
✕The loan eventually has to be repaid
A reverse mortgage generally becomes due when the borrower sells the property, permanently moves away or dies.
Heirs who want to keep the property generally need another way to repay the loan.
A reverse mortgage may be worth exploring if:
It may be less attractive if you expect to move soon, have difficulty covering ongoing property expenses or consider preserving as much home equity as possible for your heirs a top priority.
A reverse mortgage isn't the only way to access home equity.
A home equity line of credit, or HELOC, can also allow homeowners to borrow against their property.
The major difference is repayment.
HELOCs generally require monthly payments and typically involve income and credit qualification. A reverse mortgage generally doesn't require monthly principal-and-interest mortgage payments while the borrower continues meeting the requirements of the loan.
For some homeowners, a HELOC may cost less.
For others, eliminating the need for another required monthly mortgage payment may be more important.
It's worth comparing both.
Don't make the decision based solely on an advertisement or a single lender quote.
Ask:
HUD-approved reverse mortgage counseling is required for HECMs and is specifically designed to help homeowners understand questions like these before moving forward.
Your home may represent decades of mortgage payments and accumulated equity.
If you're 62 or older, it may be worth finding out how much of that equity you could potentially access and what options are available based on your age, property and financial situation.
Checking your options can help you understand what's available before deciding whether a reverse mortgage makes sense for you.
This content is for informational purposes only and is not financial, tax or legal advice. A reverse mortgage is a loan and may not be appropriate for every homeowner. Borrowers remain responsible for applicable property taxes, homeowners insurance, maintenance and other property charges. HECM borrowers must meet eligibility requirements and complete HUD-approved counseling.
Learn how a reverse mortgage may work for you
Wide product selection that may fit your unique needs
Move at your own pace – no commitments to apply