Retired? Consider a Reverse Mortgage for Extra Income

Use your home equity to get monthly payments while you stay in your home

What Is a Reverse Mortgage?

A reverse mortgage is a loan in which a homeowner who is 62 or older receives cash — usually in the form of fixed monthly payments — against the value of his or her home’s equity. This is typically done to supplement retirement income while allowing the homeowner to continue living in the home.

With a reverse mortgage, the proceeds do not need to be repaid until the home is sold or the borrowers move out or die. Often, the loan is repaid by selling the home and using the proceeds to repay the loan. When the homeowner dies, the loan is typically repaid by the heirs. The balance of the loan technically becomes due upon death, but the borrower’s heirs typically have around six months to repay it.

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Loan Amount

FHA-backed reverse mortgages: $679,650

Loan Term

Loan is repaid when the borrower dies, moves or sells house.

Interest Rate

Varies; can be a fixed rate or a variable rate.

Types of Reverse Mortgages

There are three main kinds of reverse mortgages. Each comes with its own advantages and disadvantages. Compare reverse mortgage lenders and loans to make sure you pick the one that is right for you.


Single-purpose reverse mortgages are typically the cheapest option. These are reverse mortgages offered by state or local governments, or nonprofit organizations. The proceeds from this kind of reverse mortgage can be used only for purposes specified by the lender, such as paying property taxes or making repairs. These kinds of reverse mortgages are typically offered only to low- or moderate-income borrowers.


The Federal Housing Administration (FHA) — part of the U.S. Department of Housing and Urban Development (HUD) — guarantees a reverse mortgage program called HECM — Home Equity Conversion Mortgage. This is the most common type of reverse mortgage. The maximum claim amount with a HECM is $679,650.


Proprietary reverse mortgages are offered by private companies that are not beholden to the requirements of HECMs. Proprietary reverse mortgages can exceed the HECM limits.

Do I Qualify for a Reverse Mortgage?

To be approved for a reverse mortgage, you must meet the following qualifications:

  •   Age. What is the minimum age for a reverse mortgage? Typically, reverse mortgages are only available to homeowners who are 62 years old or older. If there is more than one homeowner, the youngest homeowner must be at least 62.
  •   Home equity. You must have a certain amount of equity in your home. Typically, you must own your home outright, or have a low mortgage balance that can be paid off by the proceeds of the reverse mortgage.
  •   Property type. If you are seeking a HECM, the property must be your primary residence.
  •   Adequate finances. When you take out a reverse mortgage, the title to your home remains in your name, and you still will need to pay for expenses such as homeowners insurance, property taxes and costs associated with maintaining your house. The lender also may require that some of the loan proceeds be set aside to pay for taxes and insurance.
  •   No delinquency. If you are seeking a HECM, you must not be delinquent on any federal debt.
  •   Financial education. Federally guaranteed reverse mortgage programs require borrowers to complete a financial education course to take out a reverse mortgage. Some proprietary reverse mortgage lenders may require borrowers to complete one, too.

Is Your Home Eligible?

Reverse mortgages can only be used for your primary residence — so you’re out of luck if you want to take one out on a vacation home or investment property. Consider reverse mortgage alternatives if you want to tap into a second-home equity.

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Not Eligible for a Reverse Mortgage? Consider Alternatives.

Before deciding to take out a reverse mortgage or if you don’t qualify for one, consider alternative methods of tapping into your home’s equity.

Second Mortgage

A second mortgage can be a home equity line of credit (HELOC) or a home equity loan. Both are secured by the home’s equity, and allow the homeowners to take out a loan in addition to their outstanding home mortgage. Home equity loans are installment loans, allowing the borrower to take out an upfront lump sum. HELOCs are a form of revolving credit, meaning you can borrow as little or as much as you want up to a certain limit.

Cash-Out Refinance

If you are able to refinance your mortgage, you may be able to take advantage of a cash-out refinance, which allows homeowners to refinance their mortgage for more than the amount of the principal loan and receive the difference in cash.

Your Children

You could sell your home to your children, or even arrange a private reverse mortgage with your children, in which they would loan you money against the equity in your home. They would be repaid after selling the home upon your death. Some financial institutions specialize in setting up such family loans, and while they don’t do it for free, it could prove a cheaper option than a traditional reverse mortgage.

How Much Does a Reverse Mortgage Pay?

How much money can you get from a reverse mortgage? It depends. A number of factors can determine the amount you can get.

Age of the Borrowers

To qualify for a reverse mortgage, the youngest borrower must be at least age 62. The estimated length of the loan plays a role in determining how much you can borrow, so older homeowners may be able to borrow more money than younger homeowners.

Home Equity

The amount of equity in your home will help determine how much money you can receive from a reverse mortgage. The more equity in your home, the more money you typically will be able to borrow. Lenders will determine your home’s equity by having the home appraised.

Federal Limits

The federal government limits how much money you can borrow from their reverse mortgage programs. If you plan to get a HECM backed by the FHA, the most you’ll be able to take out is $679,650. If you want to borrow money beyond those limits, you’ll need to look into a proprietary reverse mortgage.

Interest Rates

The lower the interest rate on your reverse mortgage, the more money you will typically be able to borrow.

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How Much Does a Reverse Mortgage Cost?

Reverse mortgages are typically more expensive than traditional mortgages.

Mortgage Insurance

If you take out a HECM, you will be required to purchase FHA mortgage insurance. You will owe an upfront premium that costs 2 percent of the appraised value of the home, and an annual fee paid monthly of 0.5 percent of the mortgage balance. These costs can be financed into the loan.

Closing Costs and Fees

These can include such costs as an appraisal, inspections, credit checks, etc.

Servicing Fee

If you take out a HECM, lenders will charge you a monthly servicing fee to pay for services such as disbursing loan proceeds and sending account statements. If the interest rate is fixed or adjusts annually, lenders may charge no more than $30 a month; if the rate adjusts monthly, they may charge up to $35 a month.

Origination Fee

Origination fees for reverse mortgages typically amount to around 2 percent of the loan. For a HECM, lenders are allowed to charge the larger of $2,500 or 2 percent of the first $200,000 of your home’s value, plus an additional 1 percent for the amount over $200,000.

Borrow Wisely Tip

You Can Reverse a Reverse Mortgage

Wondering if you can get out of a reverse mortgage? Yes, you can, but only within three days of closing the loan. This is called the right of rescission. You must send a written notice to the lender to cancel the reverse mortgage.

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Is a Reverse Mortgage a Good Idea?

If you’re considering taking out a reverse mortgage, you may be asking yourself if a reverse mortgage is safe and, if so, whether a reverse mortgage is a good deal.

The answer is, it depends. Reverse mortgages aren’t for everyone, but depending on your needs, reverse mortgages could be a useful tool for supplementing retirement income while remaining in your home.

One protection for reverse mortgage borrowers is mortgage insurance. Although insurance for a “forward” mortgage is designed to protect the lender, mortgage insurance covering a reverse mortgage protects the borrower. FHA-insured HECMs are nonrecourse loans; this means if you or your heirs sell the home to pay back the reverse mortgage, you won’t be required to pay more than the amount the home sold for. As long as the home sells for at least 95 percent of its appraised value, the insurance will cover any difference.

But before you take out a reverse mortgage, consider the costs, which can include mortgage insurance, closing costs, and servicing and origination fees. In addition, consider the pros and cons.

  •  The loan doesn’t need to be repaid until the borrowers move out, sells house or dies.
  •  Source of cash for the borrower.
  •  The proceeds are generally tax-free.
  •  The borrower can’t owe more than the home’s worth with HECMs.
  •  After death, the house may not be passed on to heirs until the loan is paid off.
  •  High fees and costs, including interest, closing costs and servicing fees.
  •  The borrower could lose the house if forced to move out because of illness or for other reasons.
  •  Most reverse mortgages have adjustable interest rates, which could increase the borrower's costs if rates rise.

Selling a House With a Reverse Mortgage

Can you pay off a reverse mortgage early? That’s a trick question — unlike traditional, “forward” mortgages, reverse mortgages don’t have a specific due date; they become due when the borrower either sells their home, moves out or dies. Therefore, borrowers with a reverse mortgage can sell their home at any time. Once the home is sold, however, the balance of the reverse mortgage loan will become due. Borrowers typically will use the proceeds of the sale to pay back the loan; the borrower keeps any money left over, less the costs associated with selling the home and any other liens on the property.

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