Reverse Mortgage
A loan available to homeowners 62+ that converts home equity into tax-free cash without monthly payments, repaid when the home is sold or the borrower moves or dies.
A Home Equity Conversion Mortgage (HECM), the FHA-insured reverse mortgage, allows homeowners 62+ to borrow against their home equity with no required monthly payments. The loan balance grows as interest and fees accumulate and is repaid from home sale proceeds when the last borrower sells, moves out permanently, or dies. Remaining equity after repayment passes to heirs; if the loan balance exceeds the home value, FHA mortgage insurance covers the shortfall — borrowers and heirs are never personally liable for a deficiency.
HECM borrowing limits are based on the appraised home value (up to the 2024 HECM limit of $1,149,825), current interest rates, and the youngest borrower's age. A 75-year-old with a $400,000 home (free and clear) might access $240,000–$280,000 via a HECM line of credit or lump sum. Upfront costs are significant: origination fee (up to $6,000), FHA mortgage insurance premium (2% of appraised value upfront + 0.5%/year), appraisal ($500–$800), and closing costs ($2,000–$4,000).
Reverse mortgages are regulated to allow homeowners to remain in the home indefinitely provided they maintain the property, pay property taxes, and maintain homeowner's insurance. Failure to maintain these obligations constitutes a default and can trigger foreclosure — the primary cause of reverse mortgage problems in practice.
Real-World Example
A 78-year-old widow with $450,000 in home equity and $2,100/month in Social Security took a HECM line of credit of $280,000, drawing $3,000/month to pay for in-home aide services without selling the house, preserving the home for her heirs to the extent any equity remained at death.