It's completely normal to look at your retirement roadmap and wonder if your savings will be enough to cover every expense. For many of us, our home is our most valuable asset, so it makes perfect sense to explore how that equity might help fund the life you want to live.
What is a reverse mortgage?
A reverse mortgage is a loan taken out against your home's equity. The unique feature here is that you don't have to repay it until you no longer live in the home. This allows retirees to access wealth tied up in their property without selling it or taking on a new monthly bill.
It works differently than the mortgages most of us are used to. As the name suggests, the lender pays you, rather than you making payments to a bank. You get to stay in your home, but the loan comes due upon your passing, permanent relocation, or the sale of the property.
One of the most common options is the Home Equity Conversion Mortgage (HECM). This is also known as a Federal Housing Administration (FHA) reverse mortgage. Because it's supported by the federal government and only available through FHA-approved lenders, it's widely recognized as a standard choice for many homeowners.
How borrowing limits work
If you already have a traditional mortgage, a reverse mortgage usually pays that off first. If you own your home free and clear, the funds go directly to you. However, there's a limit to how much you can borrow.
Your principal limit is based on a few key factors:
- The age of the youngest borrower or eligible non-borrowing spouse
- Current interest rates
- The HECM mortgage limit, which is $1,253,100 for 2025 (note that this limit is subject to annual adjustments by HUD)
- The value of your home
Generally, the amount you can borrow increases with age and property value. Conversely, higher interest rates usually mean you can borrow less. It's also important to note that with a variable-rate HECM, the amounts can potentially go up over time.
Payout options available to you
How you receive the money depends on the type of interest rate you choose. If you opt for a fixed interest rate, you generally receive a single lump-sum payment when the loan closes. This is a solid choice if you want predictability and don't want payments fluctuating with the market.
If you choose a variable-rate HECM, you have more flexibility in how you get paid:
- Fixed equal monthly payments: You receive payments for a designated period that you agree upon in advance.
- Equal monthly payments: You receive payments for as long as at least one borrower lives in the home as a primary residence.
- Line of credit: You can access funds whenever you need them until the limit runs out.
- Line of credit plus fixed monthly payments (tenure): You get a steady check plus access to a credit line for as long as you live in the home.
- Line of credit plus fixed monthly payments (term): You receive a steady check plus access to a credit line for a designated period of time that you agree upon in advance.
Regardless of the option you choose, interest accrues monthly. You're also still responsible for homeowners insurance, property taxes, and home maintenance. It's vital to budget for these ongoing costs.
Who is this suitable for?
It's easy to confuse a reverse mortgage with a home equity line of credit (HELOC), but they are quite different. A HELOC typically requires you to have a good credit score and proof of income. A reverse mortgage doesn't have those same requirements.
This makes a reverse mortgage a specific tool for older homeowners who want to access equity without selling. It can be a good choice if you have limited income but need financial security in retirement. However, because it depletes your home equity, it should only be done as part of a well-thought-out retirement roadmap. We strongly recommend speaking with a CFP® professional to help you understand the long-term implications.
For some, downsizing or refinancing a traditional loan might be a better fit. It all depends on your unique situation.
Requirements you need to meet
To qualify for a HECM, there are strict criteria regarding you and your property.
Property requirements
You generally must own a house, manufactured home, condominium, or townhouse. Importantly, the home must have been built on or after June 15, 1976. Unfortunately, owners of cooperative housing (co-ops) can't obtain these loans under FHA regulations because they own shares of a corporation rather than the real estate itself.
Age and equity requirements
You must be at least 62 years old. You also need to either own your home outright or have considerable equity (usually at least 50%).
The counseling requirement
The U.S. Department of Housing and Urban Development (HUD) mandates that all prospective borrowers complete a HUD-approved counseling session. This ensures you aren't walking into the agreement blindly. The session lasts roughly ninety minutes and typically costs about $125. It covers essential topics, including how the loan might affect your eligibility for Medicaid or Supplemental Security Income (SSI).
Residency requirements
This must be your primary home. If you live outside the house for longer than one year, even if you're in a long-term care facility, the loan becomes due. Typically, this means the house must be sold to repay the debt.
The real cost of a reverse mortgage
Reverse mortgages can be expensive to set up. While most allow you to roll the closing costs into the loan so you don't pay upfront, this reduces the equity available to you.
Here's a breakdown of the typical fees associated with a HECM:
- Origination fee: This is calculated as the greater of $2,500 or 2% of the first $200,000 of the home's value plus 1% of the amount over $200,000. This fee is capped at $6,000.
- Mortgage insurance premiums (MIP): You pay a 2% MIP at closing plus an annual MIP equal to 0.5% of the outstanding loan balance. These can usually be financed into the loan.
- Servicing fees: These are capped at $30 for fixed or annually adjusted loans, and $35 for monthly adjusted rates.
- Third-party fees: Expect standard costs for credit checks, appraisals, home inspections, title searches, and recording fees.
Staying safe from scams
Because reverse mortgages involve large sums of money and often serve older adults, scams are unfortunately common. Unethical contractors may suggest a reverse mortgage to pay for home repairs, only to take the money without delivering quality work.
Sadly, seniors can also be targeted by people they know. There have been instances where family members or caregivers misuse a power of attorney to take out a reverse mortgage and steal the proceeds. Others may push you to buy complex financial products, like annuities, using the loan proceeds.
Make sure any advice you receive puts your interests first, rather than the interests of a salesperson or relative.
Refinancing and underwater protection
Can you refinance a reverse mortgage? Yes, it's possible. However, due to the high upfront costs like the origination fee and mortgage insurance, it should be considered carefully. It's usually best reserved for specific goals, like adding a spouse to the loan, accessing increased equity, or significantly lowering the interest rate.
One reassuring detail is that HECM loans are non-recourse loans. This means that even if your loan balance eventually exceeds your home's value, the lender cannot pursue you or your heirs for the difference. The mortgage insurance premiums you pay contribute to a fund that covers the lender in these underwater situations.
The Facet difference
Deciding to tap into your home equity is a major financial event, not just a simple transaction. At Facet, we don't just look at the loan; we look at the life you want to live. Our team of CFP® professionals works with you to build a comprehensive financial roadmap that considers your home equity alongside your retirement income, taxes, and estate goals. (Facet is not an attorney and does not provide tax or legal advice. Estate planning document services are provided by wealth.com, a separate third party, and are subject to separate fees). We operate on a flat membership fee, meaning our advice isn't tied to selling you a product or earning a commission on a loan. We're here to help you maximize your wealth and your wellness, side by side.
