{"id":24261,"date":"2024-07-29T08:52:46","date_gmt":"2024-07-29T15:52:46","guid":{"rendered":"https:\/\/www.homelight.com\/blog\/?p=24261"},"modified":"2026-04-16T01:57:52","modified_gmt":"2026-04-16T08:57:52","slug":"buyer-what-is-a-reverse-mortgage","status":"publish","type":"post","link":"https:\/\/www.homelight.com\/blog\/buyer-what-is-a-reverse-mortgage\/","title":{"rendered":"What Is a Reverse Mortgage \u2014 And Is it Right for You?"},"content":{"rendered":"

You\u2019re 65 years old, and you\u2019ve been in your home for 25 years. In that time, the market has gone up and up and up<\/em> \u2014 and now you have substantial equity in that property. You also have lots of expenses for everyday living, and some major healthcare bills, too. And while you\u2019re sitting on a lot of cash in your home, you don\u2019t have quite enough in your pocket. So you\u2019ve started thinking about getting a reverse mortgage<\/a>.<\/p>\n

While someone in this position might be a good candidate for a loan like this, reverse mortgages are complicated products that come with plenty of potential downsides. So if you\u2019re considering a reverse mortgage, you\u2019ll want to take the time to understand what you\u2019re getting into and consider all of the pros and cons. This primer is a good place to start.<\/p>\n\n\n\n\n\n

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Get an Estimate on Your Home's Current Value<\/h3>\n

If you’re considering a reverse mortgage, get an estimate on your home’s current value to see how much your house can help support your retirement.<\/p>\n \n

\n Get Estimate<\/a>\n <\/div>\n <\/div>\n<\/div>\n\n\n
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What\u2019s a reverse mortgage?<\/h2>\n

A reverse mortgage is a home loan<\/a> \u2014 but it\u2019s not the standard kind most homeowners seek. It is primarily designed for homeowners ages 62 or older who have substantial equity in their home<\/a>.<\/p>\n

A reverse mortgage allows these owners to borrow against their home\u2019s value. Think of it as a way for homeowners to tap into the wealth they accumulated in their homes over the years to pay for living expenses during retirement<\/a>.<\/p>\n

Instead of making<\/em> payments every month to the lender, these homeowners will receive<\/em> funds from the bank instead, choosing to accept them as a line of credit, a fixed monthly payment, or in a single lump sum.<\/p>\n

Still, these loans against home equity will indeed need to be paid back eventually, though not while the borrower is still living in the home. The balance is due when the borrower moves away from the home or sells it, or when the borrower dies.<\/p>\n

And this type of loan does not eliminate all home-related expenses. The borrower must still pay all home insurance, property taxes, utilities, and maintenance on the property<\/a>.<\/p>\n

Federal regulations on this type of loan require that the loan amount not exceed the value of the home, and that the borrower or heirs won\u2019t be responsible for paying the difference if the home\u2019s value ever falls below the loan\u2019s balance.<\/p>\n

To ensure the borrower truly understands what this type of loan means, would-be borrowers must meet with a counselor before they can get one.<\/p>\n

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Costs of a reverse mortgage<\/h2>\n

Reverse mortgages come with a lot of fees, plus interest on the loan. And that can whittle down equity fast. Let\u2019s take a look at what those costs include.<\/p>\n

Interest<\/h3>\n

Only the lump-sum option has a fixed interest rate. Otherwise, reverse mortgage rates<\/a> are variable (so they change throughout the life of the loan).<\/p>\n

Fees<\/h3>\n

Just as you might expect with a traditional mortgage<\/a>, there are various fees associated with a reverse mortgage, too. These include:<\/p>\n

Origination fee<\/h4>\n

This is the fee to establish the loan. You can expect to pay either $2,500 or 2% of the first $200,000 of the home\u2019s appraised value (whichever is more), plus 1% of the home\u2019s value above $200,000, not to exceed $6,000<\/a> total.<\/p>\n

Servicing fees<\/h4>\n

These are part of a mortgage payment that goes to a mortgage servicer handling payments for the lender. For FHA home equity conversion mortgages (HECMs, which are government-insured reverse mortgages), servicing fees are capped at $35<\/a>.<\/p>\n

Third-party fees<\/h4>\n

Plan for a collection of miscellaneous fees, including credit checks, title insurance<\/a>, and more.<\/p>\n

Initial mortgage insurance premium<\/h4>\n

You\u2019ll pay 2% up front<\/a>, due at closing, plus an annual premium of 0.5% each year after.<\/p>\n

Counseling fee<\/h4>\n

This requirement applies to Home Equity Conversion Mortgages (HECMs), the most common type of reverse mortgage.<\/p>\n

Borrowers are required to attend mandatory counseling with a third-party U.S. Department of Housing and Urban Development (HUD) counselor, at the cost of about $145 (which cannot be rolled into the loan).<\/p>\n

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The three main types of reverse mortgages<\/h2>\n

1. HUD-backed Home Equity Conversion Mortgage (HECM)<\/h3>\n

This is the most common, most popular type of reverse mortgage loan.<\/p>\n

The borrower must be 62 or older to qualify, and you can borrow up to $1,149,825<\/a>. These loans are federally insured and backed by HUD. Therefore, to get one of these loans, borrowers must pay insurance premiums, which flow into the Federal Housing Administration (FHA) reserves.<\/p>\n

With these loans, there\u2019s a limit to how much borrowers can take out the first year. The borrowing maximum \u2014 known as initial principal limit \u2014 comes from a combination of the borrower\u2019s age, the interest rate, the home\u2019s value, and the borrower\u2019s overall financial picture.<\/p>\n

2. Single-purpose reverse mortgage<\/h3>\n

This type of loan is the cheapest type of reverse mortgage. It\u2019s available for low- or moderate-income homeowners, and it is designed for one purpose, like a home improvement project<\/a>, designated by the lender.<\/p>\n

They are available through some nonprofit organizations as well as government agencies.<\/p>\n

3. Proprietary reverse mortgage<\/h3>\n

This is a loan through a private company, and it is the most uncommon reverse mortgage scenario.<\/p>\n

A borrower can use a proprietary reverse mortgage for any reason, or for multiple reasons. These generally allow for a higher loan amount than the HECM program.<\/p>\n

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How are reverse mortgages paid out?<\/h2>\n

Let\u2019s walk through the different ways you can get paid out for your reverse mortgage.<\/p>\n