Reverse mortgage: What it is and how it works

Many older homeowners have built substantial equity but lack a steady cash flow. A reverse mortgage can convert a portion of that equity into cash without a monthly mortgage payment. Rocket Mortgage doesn’t currently offer reverse mortgages, but understanding how they work, who qualifies, what they cost, and the risks involved can help you compare options, including safer alternatives.

Key takeaways:

• A reverse mortgage lets older homeowners turn equity into cash without a monthly mortgage payment, though interest and fees still accrue on the balance.
• The loan becomes due when you sell your home, move out permanently, or die, and it’s typically repaid using proceeds from the sale of the home.
• Reverse mortgages come with real risks, including shrinking home equity, high up-front costs, and a well-documented history of scams that target older homeowners.

What is a reverse mortgage?

A reverse mortgage is a loan available to older homeowners that converts home equity into cash. Unlike a traditional types of home loans, you don’t make monthly payments to your lender. Instead, your lender pays you, and the amount you owe grows over time as interest and fees are added to your balance.

The most common type of reverse mortgage is the home equity conversion mortgage (HECM), which is insured by the Federal Housing Administration (FHA) and available to homeowners age 62 and older through FHA-approved lenders.

Because Rocket Mortgage doesn’t offer reverse mortgages, this article is meant to help you understand your options, not to serve as an application guide.

How does a reverse mortgage work?

With a reverse mortgage, your lender pays you based on the equity you’ve built in your home, rather than you paying your lender. You can receive these funds as a lump sum, a line of credit, monthly payments, or any combination of the three. Meanwhile, mortgage interest and fees are added to your loan balance every month, so what you owe grows while your remaining equity shrinks.

How much money can you get from a reverse mortgage?

Your available proceeds, sometimes called your principal limit, depend on several factors: your age (or the age of the youngest borrower), your home’s value up to the national lending limit, current interest rates, and any existing mortgage balance that needs to be paid off first.

In 2026, the maximum amount FHA will use to calculate a HECM is $1,249,125, regardless of your home’s actual value, according to HUD. A lender or reverse mortgage calculator can walk you through a personalized estimate based on your specific numbers.

Reverse mortgage payment options

You can choose to receive your reverse mortgage proceeds as a lump sum at closing, a line of credit you draw from as needed, regular monthly payments, or a combination of these options. Your lender and housing counselor can help you weigh which structure fits your monthly needs and long-term plans.

How your reverse mortgage balance grows

Because you're not making monthly payments, interest and fees are added to your loan balance each month instead. That means your debt increases over time, even though you're not writing a check to your lender. This is one of the most important differences from a traditional mortgage, in which your balance and interest paid go down over time, according to the Federal Trade Commission.

When a reverse mortgage has to be repaid

A reverse mortgage becomes due and payable when you sell the home, refinance, permanently move out, or die. In general, this means the loan is repaid once you no longer live in the home as your primary residence, according to CFPB.

If you sell your home

If you sell your home, you must use the proceeds to repay your reverse mortgage balance, including any accrued interest and fees. Say you borrowed $200,000 through a reverse mortgage and later sell your home for $400,000. You’d repay the $200,000 balance from the sale and keep the remainder.

Because HECMs are non-recourse loans, you won’t owe the difference if your home sells for less than your loan balance.

If the borrower dies

When the last surviving borrower dies, the loan becomes due. Heirs typically have 30 days after receiving a due and payable notice to decide whether to buy the home, sell it, or turn it over to the lender. If heirs want to sell and the loan balance is higher than the home’s value, they can satisfy the debt by paying the lesser of the full balance or 95% of the home’s current appraised value, according to CFPB. Heirs can also transfer the deed to the lender to satisfy the debt without owing any additional funds. Heirs typically have up to 6 months to satisfy the debt, with 90-day extensions available, which can extend the period to a year.

If you move out of your home

To keep a reverse mortgage in good standing, you must live in the home as your primary residence. If you move out permanently, even into a nursing home or assisted living facility, your loan becomes due. You can repay it with personal funds or refinance into a traditional mortgage if you want to keep the home.

Who qualifies for a reverse mortgage?

There are specific reverse mortgage requirements for borrowers and properties.

Borrower requirements

• You must be at least 62 years old.
• You can only get a reverse mortgage on your primary residence, not a second home or vacation property.
• HUD requires you to complete a counseling session with a HUD-approved housing counselor before closing.
• Your lender will review your income, assets, and debts to confirm you can keep up with property taxes, insurance, and maintenance.
• You can’t have any outstanding federal debt, such as unpaid federal student loans or income taxes.

Property requirements

• Your home must be one of the following to qualify:
• A single-family home you live in full-time.
• A multiunit property with 2 to 4 units, as long as you live in one unit full-time.
• A condo, planned unit development (PUD), or manufactured home that meets FHA eligibility requirements.

Ongoing borrower responsibilities

Qualifying for a reverse mortgage isn’t a one-time event. To keep the loan in good standing, you must continue to live in the home as your primary residence, pay your property taxes and homeowners insurance on time, and maintain the home, according to the FTC.

Types of reverse mortgages

There are 3 types of reverse mortgage.

Home equity conversion mortgage (HECM)

An HECM is the most common reverse mortgage and the only type insured by the FHA. It comes with borrower protections, including the non-recourse guarantee, and requires HUD counseling before closing. Eligible properties include single-family homes, HUD-approved condos, qualifying manufactured homes, and multifamily properties with up to 4 units.

Single-purpose reverse mortgage

A single-purpose reverse mortgage is typically the least expensive option, but it comes with restrictions. Your lender, often a state or local government agency or a nonprofit, will specify exactly how you can use the funds, such as for home repairs, insurance premiums, or property tax bills. These loans usually aren’t available everywhere and tend to favor homeowners with low to moderate income.

Jumbo or proprietary reverse mortgage

If your home is worth more than the HECM lending limit, you may consider a proprietary reverse mortgage, also called a jumbo reverse mortgage. These loans are offered by private lenders and aren't insured by the FHA, which means they don't come with the same borrower protections. Fees and rates vary by lender, and HUD counseling isn't always required.

Reverse mortgage costs and fees

As with any loan, a reverse mortgage has costs and fees.

Housing counselor fees

Before you can close on a HECM, you must complete a counseling session with a HUD-approved housing counselor, who will walk you through the loan’s costs, risks, and alternatives. Counseling fees vary by agency, though you generally can’t be turned away if you can’t afford the fee.

Servicing fees and closing costs

As with any mortgage, you’ll pay closing costs to originate a reverse mortgage. These cover expenses your lender incurs verifying your income, checking your credit, drawing up loan paperwork, and completing an appraisal. Some lenders also charge an ongoing monthly servicing fee to manage your account. Many of these costs can be financed into the loan rather than paid out of pocket.

Mortgage insurance premium (MIP)

If you take out a HECM, you’ll pay an up-front mortgage insurance premium (MIP) equal to 2% of either the maximum lending limit or your home’s appraised value, whichever is lower. You’ll also pay an ongoing annual MIP of 0.5% of your remaining loan balance, which is added to your loan each month. This insurance funds the FHA’s non-recourse guarantee, so you and your heirs never owe more than the home is worth.

What to consider before getting a reverse mortgage                            

Before you apply for a reverse mortgage, you need to consider several factors.

How it affects home equity

A reverse mortgage increases your debt and reduces your equity over time, since interest is added to your balance every month. This can use up much of your equity, leaving less to pass to your heirs or less profit if you decide to sell. Before applying, it’s worth thinking through alternatives to a reverse mortgage, including whether you might eventually want to sell your home and rent instead.

What happens if you do not meet loan obligations

Falling behind on property taxes, homeowners insurance, or home maintenance, or moving out of the home for an extended period, can cause your reverse mortgage to become due and payable before you planned. If you can’t repay the balance at that point, you could face reverse mortgage foreclosure.

How it can affect heirs

Taking out a reverse mortgage can complicate your estate plans if you want to leave your home to loved ones. Your heirs will need to decide relatively quickly whether to buy the home, sell it, or turn it over to the lender, and a shrinking equity balance may limit their options.

Pros and cons of a reverse mortgage

Weigh reverse mortgage pros and cons to better understand if it’s right for you.

Advantages of a reverse mortgage

• You’re able to stay in your home. Eliminating your monthly mortgage payment and adding income can make staying in place more affordable.
• Your funds are generally tax-free. The IRS doesn’t treat reverse mortgage proceeds as taxable income.
• Your heirs have options. They can buy, sell, or turn over the home rather than being forced into a single path.
• You gain retirement cash flow. Extra income can ease pressure on a fixed retirement budget.
• You’re accessing equity you’ve already built. If you’ve owned your home for years or paid it off, you may be able to borrow a meaningful amount.

Disadvantages and risks of a reverse mortgage

• You’ll deplete your equity. Your heirs may inherit less, or you may profit less if you sell.
• It could affect other benefits. A reverse mortgage can affect eligibility for need-based programs like Medicaid.
• Your heirs could face complications. Settling the loan adds another responsibility after you pass away.
• You’ll pay various fees. Origination fees, mortgage insurance, and closing costs all add to the cost of borrowing.
• Scams are common. Reverse mortgage scams frequently target older homeowners.

How to avoid reverse mortgage scams

Older homeowners are frequently targeted by reverse mortgage scams. Knowing the common tactics can help you protect yourself and your family.

Contractor scams

Be cautious of contractors who approach you about using a reverse mortgage to pay for home repairs. This pressure tactic may be a scam, and the CFPB warns homeowners not to let anyone pressure them into taking out a reverse mortgage.

Scams targeting veterans

The Department of Veterans Affairs doesn’t offer reverse mortgage loans.¹ According to CFPB, some ads falsely promise veterans special deals, imply VA approval, or advertise a “no-payment” reverse mortgage to attract older Americans. Be skeptical of any offer that claims government affiliation or endorsement.

Report possible fraud

If you suspect a scam, let your counselor, lender, or servicer know right away. You can also report fraud to the FTC or submit a complaint to the CFPB.

Reverse mortgage vs. refinance

A reverse mortgage and a cash-out refinance both let you tap home equity, but they work in almost opposite ways. Here’s how they stack up.

If you're weighing your options, it also helps to compare a reverse mortgage with a home equity loan, since both let you tap equity but have very different repayment structures.²

How to cancel or pay off a reverse mortgage

If you decide a reverse mortgage isn’t right for you, or you’re ready to pay it off, you have three main paths to choose from:

• Right of rescission. Most reverse mortgages come with a 3-business-day right of rescission, letting you cancel for any reason without penalty. To cancel, you must notify your lender in writing, ideally by certified mail with a return receipt, according to the FTC. After you cancel, your lender has 20 days to return any money you’ve paid toward the loan.
• Sell the home. You can sell your home at any time and use the proceeds to pay off your reverse mortgage balance. Any remaining proceeds after repayment are yours to keep.
• Refinance or repay the loan. If you’d like to get out of a reverse mortgage after the rescission period, you have a few options. You can refinance into a new reverse mortgage if better terms become available, refinance into a conventional loan to resume building equity, or repay the balance using personal savings or other funds. Each option comes with its own closing costs, so it’s worth comparing them with a lender or housing counselor.

FAQ

Here are answers to common questions about reverse mortgages.

How much can a 70-year-old borrow on a reverse mortgage?

The amount you can borrow depends on your age, your home’s value, your existing mortgage balance, current interest rates, and the national lending limit. Because older borrowers generally qualify for a larger share of their home’s value, a 70-year-old may be able to access more of their equity than a younger borrower with the same home value. A lender can provide a personalized estimate based on your specific numbers.

What is the 95% rule on a reverse mortgage?

The 95% rule allows heirs to satisfy a HECM balance by paying the lesser of the full loan balance or 95% of the home’s current appraised value. This protects heirs from owing more than the home is worth if the loan balance has grown larger than the home’s value, according to CFPB.

How much money do you actually get from a reverse mortgage?

Your actual proceeds depend on your age, home value, existing mortgage balance, interest rates, and the lending limit. For example, on a home worth $400,000 with $100,000 owed on the existing mortgage, a borrower with $300,000 in equity might be approved for 60% of that amount, or $180,000, though your specific principal limit factor will vary.

What are the 3 types of reverse mortgages?

The three main types are the HECM, which is FHA-insured and the most common; the single-purpose reverse mortgage, offered by government agencies and nonprofits for a specific approved use; and the proprietary reverse mortgage, a privately insured jumbo option for higher-value homes.

Can a reverse mortgage lead to foreclosure?

Yes. If you fail to meet occupancy, tax, insurance, or maintenance requirements, your loan can become due and payable, which can lead to foreclosure if the balance isn’t resolved.

The bottom line on reverse mortgages

A reverse mortgage can provide meaningful cash flow in retirement, but it's a complex financial product that reduces your home equity and can create complications for your heirs. Before you decide, it's worth comparing the costs and obligations with other home loan options for seniors, including a cash-out refinance, a home equity loan, or a HELOC.

If you’re interested in a refinance or a new purchase mortgage instead of a reverse mortgage, you can start your application today with Rocket Mortgage.

¹ Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

² Home Equity Loan Product is a second standalone lien and may not be used for piggyback transactions. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Not available on Ameriprise products. Additional restrictions, terms, and conditions apply. Must meet qualification requirements. This is not a commitment to lend.