What Is a Reverse Mortgage (and Should You Ever Get One)?

Credit: Illustration: Ian Moore

A reverse mortgage is a unique type of loan designed for homeowners aged 62 or older. Unlike a traditional mortgage where you make monthly payments to the lender, a reverse mortgage allows you to borrow against your home's equity and receive money from the lender. However, it's crucial to understand that a reverse mortgage is not a quick ticket to free money—it comes with several important considerations. Here's what you need to know.

How does a reverse mortgage work?

Like a traditional mortgage, homeowners borrow money using their home as security for the loan. But unlike traditional mortgages, you don't make monthly payments to the lender. Instead, the amount you owe grows over time. This is for a few reasons:

The money you borrow accumulates

Interest is charged on the outstanding balance

Various fees are added to the loan

Finally, the loan typically doesn't need to be repaid until you either sell the home, move out, or you pass away.

Reasons someone would get a reverse mortgage

Like with home equity loans and home equity lines of credit (HELOCs), the main reason someone might opt for a reverse mortgage is to get access to cash while borrowing against their equity. For seniors especially, that money could be clutch for cost-of-living expenses late in life, often after they’ve run out of other savings or sources of income.

How much can you get with a reverse mortgage?

Reverse mortgages can be paid to you in any combination of the following:

All at once in cash

As monthly income

As a credit line that lets you decide how much you want and when

The amount you get varies greatly on your age, your home's value and location, and the cost of the loan. The greatest amounts typically go to the oldest owners living in the most expensive homes getting loans with the lowest costs.

Most people get the most money from the Home Equity Conversion Mortgage (HECM), a federally insured program.

Important considerations

Now don't get it twisted—a reverse mortgage is not free money. It's still a loan that must be repaid eventually. Your debt increases over time. Think of it like this:

Borrowed money + Interest + Fees each month = Rising loan balance

And with a reverse mortgage, you continue to own your home, which means you're still responsible for property taxes, homeowners insurance, home repairs and maintenance, and so on. If you fail to pay property taxes, insurance, or maintain the home, the lender can use the loan to make these payments on your behalf or require you to repay the loan in full. Plus, as your loan balance grows, it reduces the equity in your home, potentially leaving less for your heirs. And the most glaring limitation: In most cases, you must be 62 or older to qualify for a reverse mortgage.

The bottom line

A reverse mortgage can provide financial flexibility for some older homeowners, but it's not without risks and responsibilities. It's essential to carefully consider your long-term financial goals, discuss the options with your family, and consult with a financial advisor before deciding if a reverse mortgage is right for you. Remember, while you won't have monthly mortgage payments, you'll still need to budget for property taxes, insurance, and home maintenance to avoid defaulting on the loan.