How it works
The CFPB describes a reverse mortgage as a loan that uses your home as security. The Home Equity Conversion Mortgage (HECM), the most common type, is only for homeowners who are 62 and older. You keep the title, you generally do not make monthly payments, and the loan is repaid when the borrower no longer lives in the home, usually by selling it. Interest and fees are added to the balance each month, so the balance grows and your equity falls; in the CFPB's words, a reverse mortgage is not free money.
Who qualifies for a HECM
| Requirement (CFPB) | Detail |
|---|---|
| Age | 62 or older |
| Residence | the home is your principal residence, where you live most of the year |
| Equity | you own it outright or have a low balance that can be paid off at closing |
| Federal debt | no outstanding federal obligations such as unpaid income taxes or federal student loans; loan proceeds can pay them off |
| Ongoing costs | funds for taxes, insurance and upkeep, your own or set aside from the loan at closing |
| Property | meets required standards, or repairs are made first |
| Counseling | with a HUD-approved reverse mortgage agency |
How the balance grows
Because interest is added each month and nothing is paid, the balance compounds. A $100,000 draw at an example rate of 7%, with interest added monthly and fees left out:
| Years | Balance owed |
|---|---|
| 0 | $100,000 |
| 5 | $141,763 |
| 10 | $200,966 |
| 15 | $284,895 |
| 20 | $403,874 |
The rate is an input; actual loans carry their own rates and fees, which add to the balance too. The compound interest calculator shows the same growth for any rate, and the home affordability calculator and mortgage calculator the conventional loans a reverse mortgage would replace.
What you still owe
- Property taxes and homeowners insurance, which the CFPB says are required.
- Upkeep: the house must be kept in good condition.
- Living there: the home must remain your principal residence.
The tax side of selling the home later, when the loan is repaid, is covered in home sale tax exclusion.
Protecting yourself
- Three-day right to cancel with most reverse mortgages; send the notice by certified mail, the CFPB advises.
- Beware of contractors offering a reverse mortgage to pay for repairs, and of pressure to sign.
- The VA does not offer reverse mortgages; ads implying VA approval are a warning sign.
- Counseling is required for a HECM and is the place to ask every question first.
This guide follows the CFPB's pages on reverse mortgages and their requirements. The loan documents and the HUD-approved counselor are the sources for a particular loan.
Frequently asked questions
What is a reverse mortgage?
A loan secured by your home that lets older homeowners turn part of its equity into cash without monthly payments, as the CFPB describes it. The most common kind, the Home Equity Conversion Mortgage, is available only to homeowners 62 and older. You keep the title, and the loan is repaid when the borrower no longer lives in the home, usually by selling it.
Who can get a reverse mortgage?
For a HECM the CFPB lists: age 62 or older; the home as your principal residence, where you live most of the year; owning it outright or with a low balance that can be paid off at closing; no outstanding federal debt such as unpaid income taxes or federal student loans, which the loan proceeds can pay off; funds for taxes, insurance and upkeep, from your own money or set aside from the loan; the property meeting required standards; and counseling with a HUD-approved reverse mortgage agency.
How does the balance of a reverse mortgage grow?
The CFPB says interest and fees are added to the loan balance each month and the balance grows, so your equity shrinks over time. It adds that a reverse mortgage loan is not free money. A $100,000 draw at 7 percent with interest added monthly is about $200,000 after 10 years before fees.
Do I still pay property taxes with a reverse mortgage?
Yes. The CFPB says homeowners with a reverse mortgage are required to pay property taxes and homeowners insurance, keep the house in good condition and use it as the principal residence.
Can I cancel a reverse mortgage?
With most reverse mortgages, the CFPB says you have a three-day right to cancel, and it recommends sending the notice by certified mail. It also warns about contractors offering reverse mortgages to pay for repairs and about ads that falsely imply approval by the Department of Veterans Affairs, which does not offer reverse mortgages.
Sources
- CFPB: What is a reverse mortgage? (a loan using your home as security; the HECM only for homeowners 62 and older; title stays with you; no monthly payments; repaid when the borrower no longer lives in the home; interest and fees added to the balance each month; not free money; property taxes, insurance and upkeep required; principal residence; the three-day right to cancel; contractor and veteran-targeted scams; the VA does not offer reverse mortgages)
- CFPB: Can anyone take out a reverse mortgage loan? (HECM requirements: 62 and older, principal residence, own outright or a low balance paid off at closing, no outstanding federal debt, funds for taxes, insurance and upkeep, property standards, counseling with a HUD-approved agency)
General information based on the sources above, not tax, legal or financial advice.