For many Americans, their home is their largest financial asset. After decades of making mortgage payments, maintaining the property, and building equity, they may find themselves “house rich” but cash tight. Rising healthcare costs, inflation, and fixed retirement incomes can create real financial pressure. That’s why more seniors are exploring a program that allows them to convert part of their home equity into tax-free cash: the reverse mortgage.
A reverse mortgage is a unique type of home loan designed specifically for homeowners age 62 and older. Unlike a traditional mortgage, where the borrower makes monthly payments to a lender, a reverse mortgage works in the opposite direction. The lender makes payments to the homeowner. The loan is repaid later—typically when the borrower sells the home, moves out permanently, or passes away.
The most common type of reverse mortgage in the United States is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development (HUD). Because it is federally insured, the HECM program includes built-in consumer protections, including mandatory counseling from an independent, HUD-approved advisor before a loan can be finalized.
How a Reverse Mortgage Works
With a reverse mortgage, eligible homeowners can borrow against the equity they’ve built in their primary residence. The amount available depends on several factors, including:
- The borrower’s age (or the age of the youngest borrower)
- The home’s appraised value
- Current interest rates
- FHA lending limits (for HECM loans)
Generally, the older the borrower and the more valuable the home, the more funds may be available.
Homeowners can choose how they receive their money. Options typically include:
- A lump sum
- Monthly payments
- A line of credit
- A combination of these options
One popular feature is the line of credit option, which grows over time based on the loan’s interest rate. This means unused funds can increase, potentially giving borrowers greater flexibility later in retirement.
Importantly, reverse mortgage proceeds are considered loan advances—not income—so they are generally not subject to federal income tax. However, borrowers should consult a tax professional regarding their individual situation.
Who Qualifies?
To qualify for a reverse mortgage under the FHA-insured HECM program, borrowers must:
- Be at least 62 years old
- Live in the home as their primary residence
- Have significant equity in the home
- Maintain the home and stay current on property taxes, homeowners insurance, and HOA dues
- Complete required HUD-approved counseling
The home itself must meet FHA property standards and be an eligible property type, such as a single-family home, certain condominiums, or a multi-unit property (up to four units) where the borrower occupies one of the units.
It’s important to understand that while no monthly mortgage payments are required, homeowners remain responsible for property taxes, insurance, and maintenance. Failure to meet these obligations can lead to default.
What Are the Benefits?
For the right borrower, a reverse mortgage can provide meaningful financial relief and flexibility. Some of the potential benefits include:
1. Supplementing Retirement Income
Funds can be used for everyday expenses, medical bills, home repairs, or improving quality of life.
2. Eliminating Existing Mortgage Payments
Proceeds can be used to pay off a traditional mortgage, eliminating monthly payments and freeing up cash flow.
3. Aging in Place
A reverse mortgage can help seniors remain in their homes by providing funds for modifications and ongoing living expenses.
4. Flexible Payout Options
Borrowers can structure the loan to meet their needs — whether that’s steady monthly income, a safety-net line of credit, or a lump sum for a specific expense.
5. Non-Recourse Protection
HECM loans are non-recourse. This means that neither the borrower nor their heirs will ever owe more than the home’s value at the time of repayment, even if the loan balance exceeds the home’s market value.
What Happens to the Home?
A common misconception is that the bank “takes ownership” of the home with a reverse mortgage. That is not true. The homeowner retains title and ownership of the property. The lender simply places a lien on the home, similar to a traditional mortgage.
When the borrower permanently leaves the home—whether due to sale, relocation, or death—the loan becomes due. At that point, the home is typically sold. The proceeds from the sale go toward repaying the loan balance, including accrued interest and fees. Any remaining equity belongs to the homeowner or their heirs.
If heirs wish to keep the home, they can pay off the reverse mortgage—either by refinancing into a traditional mortgage or using other funds. Because HECM loans are non-recourse, if the loan balance is higher than the home’s value, FHA insurance covers the difference. This means that the borrowers (and their heirs) will never owe more than the value of the home.
Is a Reverse Mortgage Right for You?
A reverse mortgage is not a one-size-fits-all solution. For some seniors, downsizing or refinancing may be a better option. For others, especially those who plan to remain in their homes long term and need additional liquidity, a reverse mortgage can be a powerful financial planning tool.
The key is education. Borrowers should fully understand how the loan works, the costs involved, and the long-term implications for their estate. That’s one reason why HUD requires independent counseling before borrowers can proceed with a federally insured reverse mortgage.
For many seniors across the country, tapping into home equity through a reverse mortgage has provided financial breathing room during retirement. By converting part of their home’s value into accessible cash—without having to sell or move—they’ve been able to cover expenses, reduce financial stress, and stay in the homes they love.
As with any major financial decision, careful research and consultation with qualified professionals are essential. But for eligible homeowners age 62 and older, this program has become an increasingly popular way to unlock the wealth they’ve built over a lifetime.