Introduction to Reverse Mortgages

Welcome to our expert guide on reverse mortgages!  In this article, I will explain the concept of reverse mortgages by breaking down how they work in easy-to-understand terms.  Whether you are a senior homeowner considering your financial future, a family member helping a loved one navigate their options, or simply curious about how these unique mortgage solutions operate, you’re in the right place.

We explore the essentials – from eligibility to repayment – and provide the clarity you need to determine if a reverse mortgage suits you.  

ARLO™ explains how a reverse mortgage works

What is a Reverse Mortgage?

A reverse mortgage is a loan that enables homeowners to borrow from their equity without the requirement of a monthly mortgage payment.  The loan balance becomes due when the borrower dies, moves out, or sells their home.  The most common type of reverse mortgage is the Home Equity Conversion Mortgages (HECM), insured by the Federal Housing Administration (FHA).

Reverse Mortgage vs. Traditional Loans

A reverse mortgage differs from a traditional or “forward” loan because it operates precisely in reverse.  The traditional loan is a falling debt, rising equity loan.  A reverse mortgage is a falling equity, rising debt loan.  In other words, as you make payments on a traditional loan, the amount you owe is reduced.  Therefore, the equity you have in the property increases over time.

With the reverse mortgage, you make no regular payments.  So, as you draw out funds and interest accrues on the loan, the balance grows, and your equity position in the property becomes smaller.  There is never a payment due on a reverse mortgage or a prepayment penalty.  Some borrowers may choose to repay some or all the accruing interest or whatever amount they desire.  The choice is up to the borrower, depending on their goals.

Reverse Mortgage vs. Other Mortgage Types

FeatureReverse MortgageTraditional MortgageHELOCShared Appreciation
Eligibility Age62+18+18+18+
Monthly PaymentsOptional RequiredRequiredOptional
Loan PurposeAccess home equityHome purchase or refinanceAccess home equityAccess home equity, investment
Interest RatesFixed or variableFixed or variableVariableN/A
Loan RepaymentUpon moving out, sale, or deathOver loan term (e.g., 30 years)After draw period (typically 10 years)Upon sale or end of term
Equity DepletionOptionalNo, builds equity over timeYesYes, at sale or term end
Credit LineYesNoYesNo
This table provides a comparative overview of four mortgage types: Reverse Mortgage, Traditional Mortgage, Home Equity Line of Credit (HELOC), and Shared Appreciation. It highlights key features and differences among them. (Updated 2/15/2024)

How Much You Can Get From a Reverse Mortgage

The money you can receive from a reverse mortgage generally ranges from 40-60% of your home’s appraised value.  The older you are, the more you can receive, as loan amounts are based primarily on your life expectancy and current interest rates.

With a reverse mortgage, several factors dictate the loan amount:

  • The age of the youngest borrower
  • Value of the home or the 2024 lending limit (whichever is less)
  • The interest rates in effect at the time

Also factoring into the loan amount are the following:

  • Costs to obtain the loan (which are subtracted from the Principal Limit or available loan amount)
  • Existing mortgages and liens (which must be paid in full)
  • Any remaining money belongs to you.

    Discover how much you can receive from a reverse mortgage with our easy-to-use calculator.  

    How Age Affects Your Principal Limit

    You must be at least 62 years old for a reverse mortgage.  The Principal Limit of the loan is determined based on the age of the youngest borrower because the program uses actuarial tables to determine how long borrowers are likely to continue accruing interest.

    If there are multiple borrowers, the age of the youngest borrower will lower the amount available because the terms allow all borrowers to live in the home for the rest of their lives without having to make a payment.

    Of course, there will always be exceptions.  However, the premise remains that a 62-year-old borrower can accrue more interest over their life than an 82-year-old borrower with the same terms.  Therefore, HUD allows the 82-year-old borrower to start with a higher Principal Limit.

    Exploring Reverse Mortgage Payment Options

    There are several ways borrowers can receive funds from a reverse mortgage:

    • Cash lump sum at closing
    • Line of credit that you can draw from as needed
    • Payment for a set amount and period, known as a “term payment.”
    • Guaranteed payment for life (known as a “tenure payment”) lasts for as long as you live in your home.

    In addition to these options, you can use a modified version of each and “blend” the programs.  For example, a married couple in California, born in 1951 and owning a $500,000 home, may decide to get a reverse mortgage.

    The couple would like $100,000 at closing to improve their property and fund a college plan for their grandchild.  They have a more significant social security benefit that will begin in four years.  Until then, they would like to increase their monthly income by $1,000.

    They can take a modified term loan with a $100,000 draw at closing and set up a monthly payment of $1,000 for four years.  That would leave an additional $125,000 available in a line of credit.

    In addition, they would receive a guaranteed growth rate on their unused line of credit funds.

    line of credit growth chart

    How the Line of Credit Growth Rate Works 

    In the past, many considered the reverse mortgage loan a last resort.  Let us consider a borrower who is savvy and is planning for her future needs.  She has the income for her current needs but is concerned that she may need more later.

    So, she obtained her reverse mortgage and had the same $200,000 line of credit available to her after the costs of getting the loan.

    Her line of credit grows at the same rate on the unused portion of the line as what would have accrued in interest and mortgage insurance premiums had she borrowed the money.

    As the years go by, her credit line increases.  This means that if she one day needs more funds than she does now, they will be there for her.

    If rates do not change, here is what her access to credit looks like over time:

    • 10 years: $350,000
    • 15 years: $500,000
    • 20 years: $660,000

    Remember, that is, if rates do not change.  If interest rates go up 1% in the third year and one more percent in the 7th, after 20 years, her available line of credit would be more than $820,000.

    Of course, this is not income; if you borrow the money, you owe it, and it will accrue interest.  You or your heirs must pay it back when the property sells.  But where else can you ensure you will have between $660,000 and $800,000 available in 20 years?

    Lump Sum Payouts: Fixed Rate Draw Requirements

    The fixed rate requires a lump sum draw.  This means you must take the total amount of money available at the loan’s close.  You cannot leave any funds in the loan for future draws, as no future draws are allowed with the fixed rate.

    Since borrowers experienced a much higher default rate on taxes and insurance when 100% of the funds were taken at the initial draw, HUD changed the method by which the funds would be available to borrowers.  Thus, borrowers no longer have access to 100% of the Principal Limit at the close of the loan.

    ARLO shopping around for the best interest rates and closing costs.

    #1 Tip: Finding the Best Interest Rates and Closing Costs

    As for pricing, reverse mortgage lenders are the ones who set the rates and the fees at which the loans will closed.  This does not mean that they can do anything they want.  Most of the time, the secondary market drives the pricing – the value of the loans when they are ultimately sold to investors.  When the loans are very valuable, lenders have more options to enhance pricing to consumers than when the market is not actively purchasing the loans.  However, the only way for consumers to know is to shop around.  And don’t just compare a couple of fees. 

    Look at the whole picture.  Some people mistakenly go with one lender because they see one fee, like an appraisal fee of $100 less, when the lender charges a margin of .50% higher.  The margin is added to the index to determine the rate at which interest accrues and a half-percent higher margin can cost borrowers tens of thousands of dollars over the life of a loan.  So, it is important to look at everything and not be stuck on one small feature.

    Education is key.  Knowing your goals will help you procure the best loan for you.  A very low margin will accrue the least interest once you use the line.  Still, if you are looking for the most significant line of credit growth, a higher margin grows at a higher rate.

    Getting the lowest loan fees may not help if you plan to stay in your home for 20 years.  In those 20 years, the interest will cost you tens of thousands of dollars more, ruining your goal to preserve equity.  Knowing what you want from your reverse mortgage will help you choose the best option to meet your long—or short-term goals.

    ARLO explaining costs vs benefit

    #2 Tip: Evaluating Reverse Mortgage Costs vs. Benefits

    As I stated earlier, we do not recommend reverse mortgages for everyone.  If the loan does not meet your needs and you will still be scraping to get by, you must face that fact before you choose to use your equity.  If the loan doesn’t make your life easier and you will have to sell in a few years, consider making that move before you begin to erode your equity.  The next move becomes that much more difficult.

    The reverse mortgage is intended to be the last loan you ever need.  If you know you are not in your forever home, you should consider using your reverse mortgage to buy the right house instead of using it as a temporary solution — one that is not a proper solution at all.  By and large, most borrowers can benefit when they research and plan carefully.  You need to know how these loans work, what your plans are, and which options will best achieve your goals.

    Frequently Asked Questions


    How much can you get from a reverse mortgage?

    The money you can receive from a reverse mortgage loan is based on the youngest borrower’s age, current interest rates, and your home’s appraised value.  The loan-to-value on a reverse mortgage is the Principal Limit Factor.  Those percentages vary with age and rate and are based on actuarial tables.  The older you are, the higher the loan to value will be.  Similarly, the lower the interest rates, the higher the loan-to-value.


    Who owns the house on a reverse mortgage?

    When a homeowner takes a reverse mortgage loan, they remain the property owner just like they would with a traditional or “forward” mortgage.  The reverse mortgage is a loan secured against the property, and ownership is not relinquished to obtain a reverse mortgage.


    How does a reverse mortgage get paid back?

    A reverse mortgage loan is paid back when it reaches maturity or if the homeowner decides to sell their home or pay it off through other means.  When a reverse mortgage borrower passes away, the heirs to their property can either pay off the balance to keep the property or sell the home to pay off the loan balance.  If an heir inherits the property with a balance that exceeds the current market value, they can choose to pay the loan in full at 95% of the current market value, even when that is less than the amount owed. 


    Can I sell my house if I have a reverse mortgage?

    Yes, you can sell your house anytime when you have a reverse mortgage, and there is no prepayment penalty.

    Can you lose your home with a reverse mortgage?

    Yes.  When taking a reverse mortgage, you agree to maintain property charges, such as taxes and homeowner’s insurance, and occupy your home as your primary residence.  (Defined by leaving at most six months).  If you fail to maintain the loan agreement, HUD requires the servicer to call the loan due and payable.  (Also See: 5 Ways To Lose Your Home With a Reverse Mortgage


    Is a reverse mortgage a good idea?

    Reverse mortgages are not inherently good or bad.  The decision to take a reverse mortgage should always be considered an individual approach weighing long-term suitability.  If you can stay home for the foreseeable future, and the reverse mortgage allows you to live more comfortably, the reverse can be a great idea!  If you have plans to move later in retirement, consider alternatives such as the reverse mortgage for a home purchase or other home equity loans.


    Why should you not get a reverse mortgage?

    There are several important reasons to reconsider or delay obtaining a reverse mortgage, especially if you plan to sell your home in the near future.  Primarily, reverse mortgages are designed as long-term financial solutions rather than short-term fixes.  The initial expenses, including mortgage insurance and other upfront costs, can make it an impractical option for those looking to use it as a quick financial lever.  These costs can significantly diminish the benefits if the mortgage is not held for a substantial period, making it less advantageous for individuals who might move or sell their home shortly after securing the reverse mortgage.


    What are the disadvantages of a reverse mortgage?

    Reverse mortgages have a few key drawbacks. One significant limitation is that the property must be the borrower’s primary residence. If you decide to move out and wish to keep the property as a rental, you must either refinance the reverse mortgage or pay it off entirely. Additionally, reverse mortgages often entail higher closing costs compared to traditional loans. This expense increase is primarily due to the mortgage insurance required for HUD-insured Home Equity Conversion Mortgages (HECMs), making it a costlier option upfront.


    What happens if I outlive the total value of my home?

    You can stay in the home for as long as you continue to pay your taxes and insurance on the property and reasonably maintain the home, regardless of the loan balance and the value.  Outliving the home’s value does not affect your ability to remain in the property.  And your estate or heirs can never owe more than the property is worth.  A reverse mortgage is a non-recourse loan, which means that when you finally must leave the property or you pass, your heirs can keep the home and pay off the loan at the amount owed or 95% of the current market value, whichever is less or they can walk away and owe nothing if they choose not to keep the property.  The lender cannot look to your estate or to your heirs to make up any shortfalls if the property does not sell for enough to repay the loan balance.  You pay for mortgage insurance as part of the loan, and if this were to happen, the lender would file a claim with HUD, and your insurance would pay for any shortfall.


    What if I want to pay off my reverse mortgage early?

    There is never a prepayment penalty with a reverse mortgage, so you may pay any amount up to and including payment in full at any time without penalty.  You can make monthly payments (and at any time since there is no due date and never a late charge), and you can pay quarterly, bi-monthly, semi-annually, or all at once.  It is entirely up to you, and there are no negative ramifications for paying at odd intervals or all at once.


    How is the loan amount decided for the reverse mortgage?

    The loan amount for a reverse mortgage is determined by the calculations set by HUD for the program.  The calculator uses information such as the home’s value, current interest rates, and the borrower’s age to determine the benefit amount the borrower will receive.  Additionally, the program parameters consider how much you owe to determine what you can receive in the first 12 months and assess your credit history to decide if the lender needs to set aside funds from the loan to cover taxes and insurance for the borrower.  Suppose you have credit issues, particularly late taxes, insurance, or mortgage payments in the last 24 months.  In that case, informing your lender about these is important so they can advise you on the Life Expectancy Set Aside (LESA) requirements.


    Is there a prepayment penalty if I want to buy the lender out?

    There is never a prepayment penalty with a reverse mortgage.  You may prepay any portion you choose up to and including the full outstanding balance of the loan at any time without penalty.  This can be done with funds available to you, with a new loan, or if you want to sell the home.  And you aren’t really “buying the lender out” because you always own the home.  You are simply choosing to repay the loan.  Some borrowers choose to make payments on the loan.  Even though no payments are required with a reverse mortgage, you can pay any amount at any time to either slow the growth of the balance owed or begin repayment at your discretion.  And, if you choose not to make a payment any month after you begin paying for any reason, there are no adverse consequences since there was no payment due in the first place.


    Is an appraisal required for a reverse mortgage?

    Yes, an appraisal is required on all reverse mortgage transactions.  The appraiser is the eyes and ears of the lender and of HUD in the field, so not only is the appraisal required to determine a value but also to determine that there are no factors within the home itself or the immediate area that could impair the lender’s or HUD’s security.  HUD has property requirements and some restrictions, and there would only be a way to determine compliance with the on-site inspection.  In addition to ensuring that the home meets all the current HUD requirements, the lender and HUD must be sure that the property is in an acceptable minimum condition to qualify for the loan.  This can only be done with an appraisal and on-site inspection.  The appraiser will conduct a complete walk-through of the property, turning on all water faucets, making at least a “head and shoulders” inspection of the attic, and, although the appraiser is not a contractor, calling out any general instances of concern noted (roof repairs that may be needed, large cracks in the foundation, noted plumbing leaks, exposed wiring, etc.).


    Can you get a reverse mortgage with a bad credit score?

    Reverse mortgages do not even consider the borrower’s credit score.  The program is not credit score-driven.  That is not to say it does not consider the borrower’s credit history.  HUD does have minimum credit requirements for the reverse mortgage that take the borrower’s overall willingness and ability to pay their debts and afford their home into consideration.  If your credit score is low because you have had credit problems in the past and have not re-established credit since then but have paid your taxes and insurance on your property on time every year and have no other recent credit issues, you probably will have no problems with your request for a reverse mortgage assuming your income and property meet HUD requirements.  If you have paid your taxes and insurance late in the past 24 months, you would be required to have a set aside to pay the taxes and insurance on your home, but you could still get the loan.  If your credit is not good with recent accounts, you may still be able to get the loan but might also still be required to have the set aside for the payment of taxes and insurance.


    Do you still make a payment of some kind on a reverse mortgage?

    As the homeowner, you are responsible for your taxes, insurance, and any other assessments on your property (i.e., HOA dues, if any).  No mortgage payments are due for as long as you live in the home as your primary residence, but you can choose to make a payment at any time.  There is no prepayment penalty with a reverse mortgage, so if you want to pay a payment in any amount, you may do so without penalty, but none are required as long as you live in the home and pay the property charges on a timely basis.

    Key Takeaways on Reverse Mortgages

    • Reverse mortgages allow seniors to borrow against the equity in their homes without making monthly mortgage payments.  The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which the Federal Housing Administration insures.
    • To qualify for a reverse mortgage, you must be at least 62 years old, and the Principal Limit of the loan is determined based on the age of the youngest borrower.
    • The amount of funds available from a reverse mortgage is based on the age of the youngest borrower, home value, and current interest rates.
    • The loan must be repaid when the last surviving borrower dies or leaves home permanently or if they stop paying property taxes or homeowner’s insurance.
    • A reverse mortgage never has a payment due or a prepayment penalty.  Any remaining equity goes to the borrower’s heirs or beneficiaries.

    What is a Reverse Mortgage & How Does it Work - Explained by ARLO™

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