What is a reverse mortgage and how does it work?

Older homeowners often face a financial dilemma: They often have a lot of equity from years of paying down or paying off their mortgage, but need cash in retirement for living expenses. One solution is a reverse mortgage, which allows homeowners to turn their equity into cash. The most common reverse mortgage is a home equity conversion mortgage (HECM), which is insured by the U.S. government and available through FHA-approved lenders.

But a reverse mortgage is a complicated financial product. You’ll need to understand how they work, the specific requirements, and the pros and cons before applying for one.

What is a reverse mortgage?

A reverse mortgage allows older homeowners to turn their equity into cash. Instead of making payments to reduce the amount you owe your lender, you receive cash, and your loan balance increases. Rocket Mortgage currently doesn’t offer reverse mortgages, but we want to ensure you understand all your borrowing options.

You can receive your payment as a lump sum, a line of credit, regular monthly payments, or a combination of the three. The amount you can borrow depends on how much home equity you have.

A reverse mortgage first pays off your existing mortgage if you have one. You can then use the remaining funds for anything you’d like. You must continue to pay property taxes and homeowners insurance, and you’re responsible for maintaining the home.

No mortgage payments are required, and the loan only comes due when you no longer live in the home as your primary residence. This usually means the borrower has sold the home, refinanced their mortgage, permanently moved out, or died.

Repaying the loan often requires selling the home and using the proceeds to pay it back. Federal law states that reverse mortgage borrowers can never owe more than what their home is worth.

Who qualifies for a reverse mortgage?

Not everyone can apply for a reverse mortgage. Here are the requirements to qualify for an HECM:

• You must be at least 62.
• You can only get a reverse mortgage on your primary residence, not a second or vacation home.
• The U.S. Department of Housing and Urban Development (HUD) requires you to attend a reverse mortgage counseling session.
• Your lender will review your finances, including your debts and income, to ensure you can meet the financial obligations of your reverse mortgage.
• You can’t owe any federal debt, such as student loans or income taxes.

Property requirements

The home you're mortgaging must meet specific requirements for a reverse mortgage.

Your home must be one of the following:

• A single-family, one-unit residence that you live in full-time.
• A multiunit residence of 2 to 4 units. You must live in one of the units as your full-time residence.
• A condo, planned unit development (PUD), or manufactured home that meets eligibility requirements.

How does a reverse mortgage work?

The big difference between a reverse mortgage and a traditional home loan is that instead of making payments to your lender, your lender makes payments to you. This can be helpful for older homeowners who need additional income.

With most reverse mortgages, you can initially borrow up to 60% of your home equity. Lenders also may limit how much you can borrow depending on your age and the value of your home.

Here's an example: Say you have a home worth $400,000 and you owe $100,000 on your mortgage. You have $300,000 in equity. If your lender approves you for a reverse mortgage for 60% of this amount, you'll receive a payment of $180,000. How you receive that payment can vary. You might receive it as a lump sum, a line of credit, or as regular monthly payments.

The money you borrow must be repaid, but not until you no longer live in the home as your primary residence. Once you sell the home, refinance it, move out permanently, or die, the loan comes due.

But how do you pay back a reverse mortgage? That depends on whether you pass away, sell your home, or permanently move out.

If you have a HECM and sell your home

If you sell your home after taking out a reverse mortgage, you must use the proceeds from this sale to pay off your loan. Say you borrowed $200,000 with a reverse mortgage, and you sell your home for $400,000. You'd repay your lender the $200,000, plus any interest or fees, from the proceeds of your home sale. If your home sells for less than what you owe on your reverse mortgage, you won’t be responsible for making up the difference if it's an HECM.

If you have a HECM and die

Your reverse mortgage must be paid off if you die. Your heirs might sell your home and use the proceeds to pay off the reverse mortgage. If your heirs want to keep your home, they’d have to purchase it. Your heirs can also forfeit the home to your lender, which will then sell it to recoup its losses. Your heirs have 30 days after receiving a due and payable notice from your lender to either buy, sell, or turn the home over to the lender.

If you move out of your home

To qualify for a reverse mortgage, you must live in your home as your primary residence for more than half the year. If you move out, even if it's to a nursing home or assisted living facility, you must pay back your reverse mortgage. You’ll need to pay back the loan even if you wish to keep your home. You could do this with your personal funds or by refinancing your reverse mortgage into a standard mortgage.

Types of reverse mortgages

While a home equity conversion mortgage is the most popular type of reverse mortgage, there are other options. Here’s a look at some of the most common and how they work.

Home equity conversion mortgage (HECM)

The most common reverse mortgage is the home equity conversion mortgage, insured by the FHA. The most you can borrow with one of these loans in 2026 is $1,249,125. If you need to borrow more, you can apply for a jumbo reverse mortgage, also known as a proprietary reverse mortgage.

Eligible property types include single-family homes, HUD-approved condominiums, manufactured homes that meet FHA standards, and multifamily properties with no more than four units. For this last option, you must live in one of the units on a full-time basis.

Single-purpose reverse mortgage

A single-purpose reverse mortgage is typically less expensive than an HECM, but comes with limits. As the name suggests, you can only use the funds from this type of reverse mortgage for one purpose. Your lender might approve you for the loan but stipulate that you can use it only to pay for home repairs, insurance premiums, or property tax bills.

Single-purpose reverse mortgages are typically offered by charities, nonprofits, and local governments to homeowners who are struggling to pay their bills and have low to moderate income. These mortgages aren’t available everywhere.

Jumbo reverse mortgage

In 2026, you’ll need to take out a jumbo reverse mortgage – also known as a proprietary reverse mortgage – for any reverse loan amount of more than $1,249,125. Because a larger loan is riskier, your lender might charge higher fees and a higher interest rate for a jumbo reverse mortgage.

Unlike a HECM, this type of reverse mortgage isn’t insured by the FHA. That means it doesn’t come with as many protections. It also doesn’t require borrowers to attend a HUD-approved counseling session.

What to expect with a reverse mortgage

Interested in applying for a reverse mortgage? Here’s what you can expect with one of these loans:

Your existing mortgage will be paid off first

Once you are approved for a reverse mortgage, your lender will use the proceeds to pay off your existing mortgage, if you have one. This will eliminate the monthly mortgage payment you had been making.

You’ll have disbursement choices

You have options for how you will receive your funds from a reverse mortgage. You can choose to receive the money as a lump-sum payment, in monthly payments, or as a line of credit. You also can choose a combination of these three options.

While you’re receiving payments, your lender will add interest to your existing loan balance. This means the amount of money you’ll eventually owe will increase during the life of your reverse mortgage.

You’ll still pay certain bills

A reverse mortgage doesn’t eliminate all the payments associated with owning a home. You’ll still need to pay your property taxes and homeowners insurance, and you are responsible for any origination fees and closing costs on your reverse mortgage. You also must continue to maintain your home and pay any homeowners association dues.

You don’t have to pay back your reverse mortgage until you sell your home, move out permanently, or die. If you sell your home, you'll pay back what you owe at that time with the proceeds from the sale. You'll get to keep any remaining proceeds.

Housing counselor fees

When you apply for an HECM, you’re required to meet with a housing expert from a HUD-approved counseling agency. This expert will explain how HECMs work. The fees for this counseling will vary.

Servicing fees and closing costs

As with any mortgage, your lender will typically charge you closing costs to originate a reverse loan. These fees cover the expenses that your lender incurs when verifying your income, checking your credit, drawing up your loan paperwork, and completing the other tasks involved in originating your loan.

Mortgage insurance premium (MIP)

Your lender also will charge you for mortgage insurance. If you are taking out an HECM, you'll pay a one-time fee of 2% of either the maximum lending limit of $1,249,125 or your home's appraised value, whichever is lower. Your lender will also charge an ongoing annual mortgage insurance premium of 0.5% of your remaining loan balance, added to your loan each month.

Your heirs will have some options

If you pass away, your heirs will have some flexibility in repaying your reverse mortgage. They may buy the home for what's owed on the loan or for 95% of the appraised value, whichever is lower.

Your heirs also can sell the home and keep any remaining proceeds after paying the reverse mortgage balance. Or they can turn the home over to the lender to satisfy the debt. Taking out a reverse mortgage can complicate matters if you want to leave your home to your heirs.

Pros and cons of a mortgage reversal: At a glance

As with many financial products, reverse mortgages come with various benefits and drawbacks.

Advantages of a reverse mortgage

Reverse mortgages come with several benefits. Here are some of the most important:

• You’re able to stay in your home. Reverse mortgages will eliminate your monthly mortgage payment and provide you with extra income. This might offer enough financial relief to make staying in your home more affordable.
• You won’t need to pay taxes on your funds. The IRS doesn’t treat funds you receive from a reverse mortgage as income. As a result, this money isn’t taxable.
• Surviving family members have options with your estate. When the time comes for surviving family members to take over your financial responsibilities, they have plenty of options for dealing with loan repayment.
• You’ll be more financially secure in retirement. A reverse mortgage provides more money to use for other expenses since you’ll no longer have a monthly mortgage payment.
• You’re accessing existing equity. If you've owned your home for a while or paid it off, you can borrow a significant amount.

Disadvantages of a reverse mortgage

Reverse mortgages also have disadvantages. The biggest ones include:

• You’ll deplete your equity. Remember, you're borrowing from the equity in your home. This means your heirs will inherit less, or you'll reap a smaller profit if you decide to sell.
• It could affect other retirement benefits. Since a reverse mortgage can affect certain need-based assistance programs, be aware of how it could impact your eligibility for Medicaid and other retirement benefits.
• Your heirs could encounter complications. As with any financial responsibilities after losing a family member, your heirs could face a larger repayment amount than you anticipated.
• You’ll have to pay fees. Borrowers will still need to pay some fees with their reverse mortgage. These typically include origination fees, closing costs, and servicing fees.
• Reverse mortgage scams are common. Older homeowners are a frequent target of reverse mortgage scammers. Insist that reverse mortgage lenders explain the loan conditions plainly. Also, ensure these conditions aren’t too good to be true.

Reverse mortgage vs. refinance

A cash-out refinance¹ is another option if you want to borrow against your equity.

With a cash-out refinance, you refinance your existing mortgage with a new loan based on your home's current market value. This allows you to borrow more than you owe on your current mortgage, and you keep the difference after your original loan is paid off.

Say you owe $200,000 on your mortgage. You can refinance to a new mortgage of $270,000. You'd receive the extra $70,000 as a lump-sum payment. You’d then repay your new mortgage in regular monthly payments with interest.

A cash-out refinance differs from a reverse mortgage in that you’ll still make payments to your lender after receiving your cash.

Here’s a look at how a cash-out refinance compares to a reverse mortgage:

Can you cancel a reverse mortgage?

You might want to cancel your reverse mortgage. Maybe your financial situation has improved, and you no longer need the extra income the loan provides. Or you might need to sell the house and move into an assisted living community.

There are a few ways you can cancel a reverse mortgage:

• Exercise your right of rescission. This provision protects consumers in a wide variety of contracts if they experience “buyer’s remorse.” You must act quickly, though. This right is only in effect for the first 3 days after you close on the contract. If you want to cancel your reverse mortgage during this time, you must notify your lender in writing.
• Sell the house. You can use the proceeds from the sale to pay off the reverse mortgage loan. Anything extra is yours to keep. And thanks to the FHA insurance you have on your home, you don’t have to cover the difference if your home sells for less than what you owe on your reverse mortgage loan.
• Refinance your reverse mortgage loan. Just as with a standard mortgage, reverse mortgages can be refinanced if better terms or a lower interest rate become available. Remember that you’ll have to pay closing costs and other fees when you refinance.
• Return to a conventional loan. You also can refinance into a conventional loan. You'll once again make monthly mortgage payments that should build equity in your home for your use in the future, or for your heirs when you pass. Again, you will have to pay closing costs when you refinance.
• Pay back the reverse mortgage loan with your own funds. If you want to keep your home and cancel the loan, you can pay it back as a lump sum or in agreed-upon installments. Of course, this could require a significant amount of cash you'll have to pull from savings or a retirement account.

The bottom line: Reverse mortgages can be risky

A reverse mortgage can be helpful if you need an additional source of cash during your retirement years. But these mortgages are complex and carry risks. This is especially so if you want to leave your home to your loved ones after you die. A reverse mortgage might make this financially challenging for your heirs.

If, instead of a reverse mortgage, you want to apply for a refinance or a new purchase mortgage, you can do so with Rocket Mortgage. You can start your loan application here.

¹Refinancing may increase finance charges over the life of the loan.

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