What Is a Reverse Mortgage and How Does it Work?
Learn how a reverse mortgage loan works and what it offers so you can decide if one might be a good fit for you.
What is a Reverse Mortgage?
A reverse mortgage enables homeowners age 62 and above to access their home equity as cash without having to repay the loan until they sell the property, relocate permanently, or pass away.
The majority of reverse mortgages today are Home Equity Conversion Mortgages (HECMs)—the sole type of reverse mortgage backed by Federal Housing Administration (FHA) insurance.
How Does a Reverse Mortgage Work?
A reverse mortgage allows you to tap into your home’s equity. Your home equity represents the difference between your property’s present market value and any outstanding mortgage debt you may have. Rather than making monthly payments to a lender as you would with a conventional mortgage, a reverse mortgage flips the script—the lender makes payments to you (essentially providing an advance against the equity you’ve built in your home).
How reverse mortgage loan proceeds work
The funds you’re eligible to receive are determined by three key factors: your age, your home’s appraised value, and prevailing interest rates.
Our free reverse mortgage calculator can give you an estimate of your potential loan amount.
You have multiple options for accessing your funds: a one-time lump sum payment, a line of credit, or scheduled monthly payments (either for a specified term or for as long as you remain in the home).
The line of credit stands out as the most favored choice. Interest accrues only on the amount you actually withdraw, while your untapped credit line increases over time (at the same rate as your loan balance)—expanding your available funds as the years go by.
Your reverse mortgage proceeds can be used for any purpose you choose. Popular applications include boosting retirement cash flow; eliminating an existing mortgage through refinancing; consolidating outstanding debts; covering in-home care or home improvement costs; or creating lasting memories and experiences with loved ones.
As with other forms of borrowed funds, reverse mortgage proceeds typically aren’t considered taxable income.* Additionally, your Social Security benefits and standard Medicare coverage usually remain unaffected.
How the loan balance and repayment works
With a reverse mortgage, your outstanding loan balance increases over time. As the borrower, you have complete flexibility—you can contribute any amount toward the balance each month, make occasional payments, or skip monthly mortgage payments entirely. You’re still responsible for home maintenance, property taxes, and homeowners insurance.
As long as you fulfill all loan obligations, repayment isn’t required until the property ceases to be your primary residence (such as when you move out permanently or pass away).
The loan is usually repaid through selling the home. Should your heirs wish to keep the property, they can purchase it by paying either 95% of its appraised value or the full loan balance—whichever amount is lower. Alternatively, they may refinance the home in their own name or decline ownership (at which point the property is typically listed for sale).
You or your heirs retain any remaining equity after the loan is settled. Should your reverse mortgage balance exceed your home’s value, you, your estate, and your heirs have no obligation to cover the shortfall—this protection comes from the loan’s non-recourse provision.**
The costs of reverse mortgage loans
Although reverse mortgage fees can be higher than those associated with traditional mortgages, the trade-off may be worthwhile—offering enhanced financial flexibility during retirement through improved cash flow and the ability to postpone repayment until later.
Nearly all initial expenses can be financed into your reverse mortgage loan, including: the appraisal fee, third-party closing costs, the upfront mortgage insurance premium (MIP, set at 2.0% of the loan’s maximum claim amount), and an origination fee (which has regulatory limits based on your home’s appraised value). The one exception is the HECM counseling session, which costs approximately $125 and must be paid directly at the time of service.
Ongoing expenses include the annual MIP (0.5% of your outstanding balance) and loan servicing fees (which Fairway does not charge). These costs are added to your loan balance and accumulate interest over time.
Basic Qualifications for a Reverse Mortgage
To be approved for a reverse mortgage, you must fulfill these requirements:
- A minimum age of 62 is required for at least one borrower. Texas requires both spouses to be 62 or older.
- Your home must be a single-family dwelling, a multi-unit property with 2-4 units, or an FHA-approved condominium
- You must demonstrate acceptable credit history
- You must participate in counseling through a HUD-approved agency
- You cannot be in default on any federal debt
- You must hold title to the property with either complete ownership or considerable equity
- The home must be your primary residence (you must occupy it for a minimum of 6 months each year)
Types of Reverse Mortgages.
Beyond the standard HECM reverse mortgage, Fairway provides other reverse mortgage products designed to align with your unique retirement strategy.
- If you own a higher-valued property, a jumbo reverse mortgage allows you to access significantly more equity than a standard HECM reverse mortgage (which currently caps at $1,249,125).
- If you’re planning to purchase a new home, there’s a specialized reverse mortgage for that purpose—the HECM for Purchase. Our HECM for Purchase (H4P) calculator can provide you with an immediate estimate
Strategic Uses for a Reverse Mortgage
A reverse mortgage can serve multiple purposes depending on your financial goals and circumstances. Here are several ways homeowners utilize reverse mortgages and the advantages they offer.
1. Boost retirement income and lifestyle
Make the most of your retirement years by creating cherished experiences. It’s unfortunate when retirees sit on substantial home equity while missing out on travel opportunities, family milestones like grandchildren’s graduations, or even simple pleasures like dining out due to budget constraints. Instead, you can free up cash flow in retirement and share meaningful experiences with loved ones.
2. Address urgent financial needs
During challenging economic periods, having liquid cash opens up valuable opportunities. Whether it’s to help cover medical expenses, fund home improvements, or just to have more cash on hand in order to create a financial cushion, a reverse mortgage loan can help add the flexibility you need to deal with urgent matters as they present themselves.
3. Maximize your charitable giving or family legacy*
When you consult with a qualified financial advisor specializing in life insurance and estate planning, you’ll discover various financial products designed for individuals with available cash. Some of these strategies may create a more substantial legacy than simply leaving behind a mortgage-free home. Discuss with your financial advisor which products align with your unique circumstances and goals.
4. Preserve other retirement assets*
Tapping into reverse mortgage proceeds can potentially insulate your investment portfolio in retirement. An increasing number of retirees incorporate reverse mortgages into comprehensive retirement income strategies. Consult your financial advisor about integrating this financing tool into your broader financial plan.
Learning more about reverse mortgages
To learn more, check out the different reverse mortgage loans options or contact our team today
*This is not tax or financial advice. Please consult your tax and/or financial advisor for your specific situation
** There are some circumstances will cause the loan to mature and the balance to become due and payable. The borrower is still responsible for paying property taxes and insurance and maintaining the home: credit subject to age, property, and some limited debt qualifications. Program rates, fees, terms, and conditions are not available in all states and subject to change.