Home-secured loan that lets an eligible older homeowner access equity while deferring ordinary monthly loan repayment.
A reverse mortgage is a home-secured loan that lets an eligible older homeowner convert part of the home’s equity into borrowed funds without the standard required monthly principal-and-interest payments of a forward mortgage. Interest and eligible charges are added to the balance, so the amount owed usually grows rather than declines.
The homeowner keeps title to the property. The loan is not free money, a home sale, or a government benefit. It is debt secured by the home and must eventually be repaid.
Reverse mortgages change both household cash flow and the amount of equity that may remain for a future move or estate. A homeowner may receive funds as a lump sum, monthly advances, a line of credit, or an available combination, depending on the product. Each advance increases the debt, and interest and charges continue to accumulate.
The most common U.S. reverse mortgage is the FHA-insured Home Equity Conversion Mortgage (HECM). Proprietary reverse mortgages are private products with their own eligibility, proceeds, pricing, and protection rules. A feature described for HECMs should not automatically be assumed to apply to every proprietary loan.
| Item | Typical direction while the loan remains outstanding |
|---|---|
| Cash advanced to the homeowner | Increases funds received and loan balance |
| Interest and financed charges | Increase loan balance |
| Voluntary borrower repayment | Reduces loan balance |
| Home appreciation | May increase equity, but is not guaranteed |
| Growing loan balance | Reduces equity if value does not rise by at least as much |
A reverse mortgage does not require the homeowner to use every dollar available. Drawing only what is needed can reduce the balance on which future interest and charges accrue.
The term usually appears when an older homeowner is comparing ways to access equity, supplement cash flow, pay off an existing mortgage, or finance a new principal residence through a HECM for Purchase.
For a HECM, the process includes several program-specific stages:
Deferring ordinary monthly principal-and-interest payments does not eliminate the homeowner’s other responsibilities. A HECM borrower generally must:
A lender’s financial assessment may result in a Life Expectancy Set-Aside (LESA) for certain property charges. A LESA uses part of the principal limit; it is not extra money added to the loan.
A 72-year-old homeowner has substantial equity and a small remaining mortgage balance. After counseling and underwriting, the homeowner closes a HECM. Part of the available proceeds pays off the existing mortgage, part is reserved in a LESA for eligible property charges, and the remaining amount is placed in a line of credit.
The old monthly mortgage payment ends, but the homeowner still must occupy and maintain the property and meet any property-charge obligations not handled by the LESA. Amounts later drawn from the credit line, plus interest and eligible charges, increase the reverse mortgage balance.
A reverse mortgage differs from a Home Equity Loan because a home equity loan normally provides a lump sum followed by scheduled monthly repayment. It differs from a HELOC because a HELOC usually has a draw period and later repayment period with required payments.
It differs from a Cash-Out Refinance, which replaces an existing mortgage with a larger forward mortgage and ordinarily requires monthly repayment. It also differs from selling the home because the reverse mortgage borrower keeps title while the loan remains secured by the property.
The absence of a standard monthly principal-and-interest payment also does not mean the loan has no payment risk. Failure to meet occupancy, tax, insurance, or maintenance requirements can cause default and make the loan due and payable.