What Is A Reverse Mortgage, And How Does It Work?  

Key Takeaways

• A reverse mortgage is a loan designed for homeowners age 62 or older, offering funds that are repaid when the borrower dies, moves out, or sells the home. 
• Although you don’t need to make monthly payments with a reverse mortgage, it will continue to accrue interest on the balance of the loan. 
• You must keep up with property taxes, homeowners insurance, and home maintenance, and failure to do so could mean foreclosure. 

For homeowners age 62 and older, a reverse mortgage is one option that lets you tap your home equity for cash. It can be a useful tool for supplementing retirement income or paying off some unexpected bills, but it’s not right for everyone.  

We’ll go over reverse mortgage pros and cons, as well as how it compares to other home equity options, like a home equity agreement with Unlock. Keep reading to learn what a reverse mortgage is and the requirements for getting one so you can decide whether it’s the right choice for you. 

What Is a Reverse Mortgage?

A reverse mortgage is a loan. It is open to homeowners who are 62 or older and either own their homes outright or have a minimum equity of 50%.

When you take out a reverse mortgage, you borrow money against the value of your home. You can choose to receive the loan amount as a lump sum, fixed monthly payments, a rolling line of credit or a combination of these.

One of the main advantages of a reverse mortgage is that you don’t have to make monthly repayments. Instead, the entire loan balance becomes due when you:

• Die
• Sell the property
• Move or relocate for over a year, including moving in with relatives, into a nursing home or into an assisted living facility

Another benefit of reverse mortgages is that, per federal law, the loan balance can’t exceed the property’s value. That means you or your heirs won’t have to cover the difference if your home’s market value drops or if you live a long time.

How Does a Reverse Mortgage Work?

With a reverse mortgage, you enter a loan agreement with a lender that offers you cash using your home as collateral. It’s called a reverse mortgage because instead of you paying the mortgage lender each month, the lender pays you, either up front or in monthly installments. You can continue to live in the home, and repay the loan when you die, move out, or sell the home. 

The most popular type of reverse mortgage is called a home equity conversion mortgage (HECM). To get one, you’ll typically need to meet with a counselor, submit your finances for review, and pick a payment option. Here’s what you can expect when you apply for a HECM. 

1. You’ll Meet with a Financial Counselor 

The first thing you’ll need to do is meet with a mortgage counselor from a government-approved housing counseling agency. You’ll find counseling agencies near you on the website for the U.S. Department of Housing and Urban Development (HUD). 

These agencies normally charge a fee. You don’t have to pay it right away, though. You can use the loan proceeds to cover the fee at a later date. Agencies cannot turn you away if you can’t afford to pay this fee. 

At the meeting, your counselor will explain: 

• The costs of the loan 
• The financial implications 
• Possible alternatives, such as other types of reverse mortgages or different government programs 
• How different factors — such as payment plans, fees, interest, insurance, and other expenses — will affect the total loan cost over time 

2. The Lender Will Review Your Finances

HECMs usually don’t have income requirements. However, your lender must still assess your finances before approving the loan. 

The lender will decide whether you meet the mortgage requirements. It will also evaluate your ability to pay property taxes and homeowners’ insurance. In some cases, the lender may choose to deduct funds from the loan amount and make these payments for you. You’ll still be responsible for maintaining the home, though. 

3. You Will Choose a Payment Plan

If the lender approves your application, you can decide how you want to receive the proceeds. There are six main ways  to receive the funds: 

• Lump sum. The lender pays you the entire loan amount upfront. This is the only payment plan with a fixed interest rate, but you may not be able to borrow as much as with the other options. 
• Tenure plan. The lender makes fixed monthly payments for as long as at least one borrower lives in the home. 
• Term payments. The lender makes fixed monthly payments for an agreed period, such as 10 years. 
• Line of credit. You can borrow money when and as you need it, and pay interest (with an adjustable rate) only on the credit you actually take out. 
• Tenure plan plus a line of credit. The lender makes fixed monthly payments as long as at least one borrower lives in the home. If you need more money, you can tap into a line of credit. 
• Term payments plus a line of credit. The lender makes fixed monthly payments for a set period. If you need more money during or after that period, you can access a line of credit. 

If you want to change your payment plan at a later date, you may be able to do so for a small fee. 

How Much Can You Borrow with a Reverse Mortgage?

The amount you can borrow on a reverse mortgage is called your initial principal limit. This amount depends on the lender, your payment plan and several other factors, including: 

• Your age 
• The type of mortgage  
• The loan’s interest rate 
• The appraised value of your home 
• How much you owe on the home 
• The amount of equity you have in your home 
• Your ability to pay property taxes and homeowners insurance 

As a general rule, the older you are and the more equity you have in the property, the more you can borrow. 

For the most common type of reverse mortgage – a Home Equity Conversion Mortgage – how much you can borrow depends on: 

• The interest rate 
• The age of the youngest borrower or, if you’re married, the age of the younger spouse (even if they are not a borrower) 
• Your home’s appraised value or the maximum claim amount as set by the Federal Housing Administration ($1,249,125 for 2026), whichever is less. 

In any case, you can’t borrow 100% of your home’s value. Part of your equity will go toward the loan expenses, including the origination fee, interest and mortgage insurance premiums. 

Government policy also affects the initial principal limit. In 2017, the government lowered the initial principal limit to ensure borrowers retain more equity. Unfortunately, that has also made it harder for younger homeowners to qualify for a reverse mortgage. 

Furthermore, if you choose to receive the loan amount as a lump sum or line of credit, you can’t borrow the entire initial principal limit in the first year. You can generally borrow up to 60% — possibly more if you’re using the funds to pay off a forward (regular) mortgage. 

What is the Difference Between a Regular and Reverse Mortgage?

A “regular” or forward mortgage is a loan that enables you to buy a home. There are a few key differences between a reverse mortgage and a regular mortgage. 

First, unlike a regular mortgage, you can only take out a reverse mortgage if you already own your home or have built substantial equity in it.  

Reverse mortgages are only available to people who are 62 or older, whereas forward mortgages have no age limit. 

Another key difference is that with a forward mortgage, you have to make regular loan payments. With a reverse mortgage, the lender pays you, and the loan balance only becomes due when you die, sell your home, or move away for a year or more. 

What is the Difference Between a Reverse Mortgage and a HEL? 

Reverse mortgages, home equity loans (HELs), and home equity lines of credit (HELOCs) are loans that let you borrow money against your home equity. However, they have some important differences. 

When you take out a HEL, you receive a single lump-sum payment that you then repay in regular installments at a fixed interest rate. 

With a HELOC, you get access to a rolling line of credit. You can borrow money when and as you need it, and only owe interest on the amount you actually use. 

To qualify for a HEL or HELOC, a lender will evaluate your credit score, loan-to-value (LTV) ratio and debt-to-income (DTI) ratio. In contrast, reverse mortgages don’t have credit score or income requirements. 

What Types of Reverse Mortgages Are There? 

There are three main types of reverse mortgages. 

Home Equity Conversion Mortgage (HECM) 

This is the most common type of reverse mortgage. HECMs are federally insured reverse mortgages, backed by the Federal Housing Administration (FHA) and available through FHA-approved lenders. You may use a HECM loan for any purpose. 

Single-Purpose Reverse Mortgage 

As the name suggests, you may only use this type of mortgage for one thing, such as to fund home repairs or improvements or pay property taxes. The lender must approve the specific use. 

This is the least expensive reverse mortgage option, and it is open to people with low or moderate incomes. However, single-purpose reverse mortgages aren’t widely available. You can get them from some non-profit organizations and some state and local government agencies. 

Proprietary Reverse Mortgage 

A proprietary, or jumbo, reverse mortgage is aimed at seniors with higher-value homes, typically above the 2026 limit of 1,249,125 set by the Federal Housing Administration (FHA). The companies that develop them also back them, which is why they’re called proprietary. 

Pros and Cons of a Reverse Mortgage

A reverse mortgage may be a great solution for some people, but it’s not for everyone. Before applying for a reverse mortgage, you and your family should carefully weigh the pros and cons. 

The Pros

• Tap your equity without selling: A reverse mortgage can provide you with cash when your net worth is locked up in your property, but you don’t want to sell it or move out. You can continue living in your home and even sell it to your children or grandchildren at the end of the term. 
• No income or credit score requirements: You could consider a reverse mortgage if you don’t qualify for other solutions, such as personal or home equity loans. 
• No monthly payments: With a reverse mortgage, you don’t have to make any monthly payments. The loan balance — including the premium, interest, insurance and loan fees — only becomes due when you die, move out or sell the property. 
• Proceeds aren’t taxable: The IRS doesn’t consider the money as income but rather as a loan advance. Therefore, you don’t have to worry about paying income tax on the funds you receive. 

The Cons

• Risk of foreclosure: A reverse mortgage uses your home as collateral. That means you risk foreclosure if you fail to meet certain conditions, such as paying property taxes and homeowners’ insurance, or maintaining your home. 
• No right to the property for others living in the home: If you live with someone other than your spouse, such as a relative, friend or roommate, they won’t have any right to live in the property after you die or move out. In some cases, this could apply to your widow or widower after your death. 
• Scams: Unfortunately, scammers target vulnerable seniors. A common fraud involves offering a “secure” reverse mortgage to help fund home improvements. Once you sign the paperwork, the vendor or home improvement contractor takes off with your money. 

Reverse mortgage eligibility and guidelines 

To be eligible for a reverse mortgage, you must be 62 or older and either own your home outright or have considerable equity in it — in most cases, at least 50%. 

You need to live in your home and maintain it in good condition. You will also be responsible for paying property taxes and homeowners’ insurance. 

Alternatives to Reverse Mortgages 

If a reverse mortgage isn’t the right fit, but you still want the flexibility of tapping your home equity for cash, there are alternatives.  

Home Equity Agreement 

A home equity sharing agreement (HEA) offers you payment today in exchange for a future share of your home’s equity. It means you can stay in your home and get the cash you need without monthly loan payments.  

Unlock’s home equity agreement offers a lump-sum payment up front, with no restrictions on how you use the funds. When you’re ready to settle the home equity agreement — typically 10 years from now — you can choose to sell your home or settle with cash on hand. 

Home Equity Loan or Line of Credit 

These home equity products are structured so that you receive cash when you need it, paying back the borrowed money with interest. Your home equity secures the loan, so if you default on your payments, the lender could take your home. 

Home equity loans typically offer fixed interest rates and fixed payments, while HELOC payments can change as your interest rate adjusts or you borrow more. That can make it tough to predict your budget. 

Refinancing your current mortgage 

If you have a mortgage on your home, you could refinance it for a larger amount, taking the difference in cash. This is called a cash-out refinance, and it replaces your current mortgage and interest rate with an all-new loan and terms. While cash-out refinancing can offer predictable monthly payments, rising interest rates and a larger principal loan amount may mean higher monthly payments.  

If none of these options are quite right, either, you could consider selling the home. However, that means you’d need to find a new place to live, and it may not help with your cash flow the way other options can. 

Unlock HEA vs. Reverse Mortgage: What’s the Difference? 

On the surface, a home equity agreement sounds very similar to a reverse mortgage. Both offer funds now, and don’t require payment until far in the future. The homeowner retains the title in both situations, as well. 

However, there are a few very important differences when it comes to a shared equity agreement vs. a reverse mortgage. 

• Age limit: Minimum age requirement of 62 for a reverse mortgage. No age requirement for HEA. 
• Qualifications: Reverse mortgage lender may require counseling, origination fee, closing costs, and mortgage insurance premiums. HEA does not.  
• Minimum equity: Typically must have at least 50% equity for reverse mortgage. Minimum equity for HEA is typically 40%, but in some cases may be as low as 20% or 30%. 
• Payout options: Multiple payout options for reverse mortgages. Upfront, lump sum payout for HEA. 
• Interest: Reverse mortgages may have fixed or adjustable interest rates. HEA does not have monthly interest payments. 
• Payments: You can make monthly payments on a reverse mortgage to stay ahead of interest accrual. Payment is due upon your death, move-out, or sale of the home. There are no monthly debt or interest payments for an HEA, and you can settle the agreement with cash at any time during the agreement period (usually 10 years). 

Conclusion 

Before applying for a reverse mortgage, consider all your options. There are other ways to access equity in your home. Some of these alternatives – such as Unlock’s Home Equity Agreement (HEA) – don’t involve monthly loan payments and may be a better fit for you.