A reverse mortgage (HECM) converts your home equity into cash without monthly payments. You must be 62+, own the home outright or have significant equity, and live in it as your primary residence. The loan balance grows over time as interest accrues. The loan is repaid when you sell, move out permanently, or pass away. Counseling is required before closing.
Qualifications: 62+, Equity, Primary Residence
To qualify for a reverse mortgage (Home Equity Conversion Mortgage or HECM), you must be at least 62 years old, own the home outright or have significant equity, occupy the home as your primary residence, attend a HUD-approved counseling session, and have the financial resources to continue paying property taxes, insurance, and maintenance. The home must be a single-family residence, HUD-approved condo, or manufactured home that meets FHA standards.
How Funds Are Received
You can receive reverse mortgage funds in several ways: a lump sum (single payment at closing), monthly tenure payments (guaranteed monthly payments for life), monthly term payments (fixed amount for a set period), a line of credit (draw funds as needed, and the unused portion grows over time), or a combination of these. The line of credit option is most popular because you only pay interest on what you use.
Costs: Origination Fee, MIP, Servicing Fees
Reverse mortgages have higher upfront costs than traditional mortgages. Origination fees up to $6,000, upfront MIP of 2% of the appraised value, annual MIP of 0.5%, appraisal fee ($400-$600), counseling fee ($125), and servicing fees ($30-$35/month). These costs are typically financed into the loan. The total cost can be $10K-$20K, which is why reverse mortgages are not for short-term use.
What Happens When the Loan Ends
The loan becomes due when the last borrower dies, sells the home, or moves out permanently (12 consecutive months in a care facility or 6 consecutive months for other reasons). The home is sold, and the loan balance (principal + interest + fees) is repaid. Any remaining equity goes to you or your heirs. Heirs can also choose to pay off the loan and keep the home (at 95% of appraised value if the loan exceeds the home's value).
Pros and Cons
Pros: No monthly payments required, tax-free income, stay in your home, non-recourse (you can never owe more than the home is worth), line of credit grows over time. Cons: High upfront costs, accruing interest reduces equity, must maintain home and pay taxes/insurance, affects eligibility for means-tested benefits (Medicaid, SSI), reduces inheritance for heirs.