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Understanding the Intricacies of Reverse Mortgages

Understanding the Intricacies of Reverse Mortgages

July 13, 2023

Home equity often comprises a substantial share of the average retiree's wealth. For individuals aged 62 or above who have significant equity in their homes but limited cash flow, a reverse mortgage can provide an avenue to transform part of this home equity into liquid assets. This cash can be utilized for home improvements, mortgage repayment, supplementing retirement income, or healthcare expenses. However, it's crucial to note that reverse mortgages do come with associated risks.

Defining a Reverse Mortgage

A reverse mortgage essentially works as the inverse of a conventional mortgage. Instead of you making monthly payments to your lender, the lender makes payments to you. Three categories of reverse mortgages are accessible:

  • Single-purpose reverse mortgages are offered by state and local government entities and non-profit organizations.
  • Federally insured reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs), are underwritten by the U.S. Department of Housing and Urban Development (HUD).
  • Proprietary reverse mortgages are private loans that are backed by the companies which develop them.

Advantages of a Reverse Mortgage

The primary advantage of a reverse mortgage is that it allows eligible homeowners to continue residing in their homes while utilizing their equity for any chosen purpose. Depending on the lender, borrowers may opt to receive monthly payments, a lump sum, a line of credit, or a combination of these. A line of credit provides the most flexibility, enabling homeowners to draw upon their equity as needed up to the loan limit.

Unlike home equity loans, most reverse mortgages do not require repayment of the principal, interest, or servicing fees as long as the homeowner resides in the property. Instead, the loan is repaid upon the homeowner's death or when the home is sold.

The proceeds from a reverse mortgage are typically tax-free, with interest deductions applicable once the debt is paid off. Upon your passing or moving out, the loan is settled by selling the property. Any residual equity goes to you or your heirs.

Many reverse mortgages do not have income limitations. For individuals receiving Social Security Supplemental Security Income, reverse mortgage payments do not impact your benefits, provided they are expended within the month they are received. This rule is also valid for Medicaid benefits in most states.

Eligibility Criteria for a Reverse Mortgage

To qualify for a reverse mortgage, you generally must:

  • Be 62 years of age or older.
  • Either own your home outright or meet required equity criteria.
  • Reside in the home.
  • Be capable of paying property-related expenses, including taxes, insurance, maintenance and repair costs, and any homeowners association fees.

Maximum Loan Amounts

Maximum loan amounts vary depending on the lender, ranging from 50% to 75% of the home's fair market value. As a general rule, the older the homeowner and the more valuable the home, the higher the available loan amount. All reverse mortgages contain nonrecourse clauses, meaning the debt cannot surpass the home's value.

Maximum loan limits depend on the home's value, the borrower's age and life expectancy, the loan's interest rate, and the lender's policies. For instance, homeowners opting for a reverse mortgage through the Federal Housing Administration would be subject to a maximum loan limit, even if the home's appraised value is higher.

Potential Downsides of Reverse Mortgages

If you anticipate moving in the near future or may need to relocate due to illness or an unforeseen event, a reverse mortgage may not be the optimal choice. Furthermore, if your home already carries a sizable mortgage, a reverse mortgage may not be feasible as the existing mortgage must be paid off first. Additional potential disadvantages of reverse mortgages include:

  • Accumulation of Large Interest Debt. Reverse mortgages are characterized as rising-debt loans, as the interest is added to the loan balance monthly. Since it is not currently paid, the total interest owed can escalate considerably over time as the interest compounds.
  • Diminished Assets for Heirs. If your intention is to leave your home to your children or other heirs, a reverse mortgage may not be ideal as most of the home equity could go to the lender when the property is sold, reducing the inheritance for your heirs.
  • Upfront Costs. The substantial upfront costs of reverse mortgages may deter some individuals. All three types of plans impose an origination fee, interest rate, closing costs, and servicing fees. Insured plans also charge insurance premiums.
  • Adjustable versus Fixed Interest Rates. Numerous reverse mortgage plans offer annually or monthly adjustable interest rates tied to a financial index, sometimes with caps on rate fluctuations. Reverse mortgages with monthly adjustable rates have no cap. It's important to remember that a higher rate accelerates the depletion of your equity.


Reverse mortgages are a sophisticated financial instrument that may be suitable for some retirees with significant home equity and limited cash flow who intend to age in place. However, they are not a one-size-fits-all solution. Do not hesitate to contact us if you have questions about how a reverse mortgage could integrate into your retirement planning strategy.