Your dad owns his house outright, but his savings are thin and he wants to stay home with some paid help. A television ad says a reverse mortgage could give him tax-free cash with no monthly payments. He asks what you think. You want to help him decide clearly, without pressure and without missing the catch.
This guide is not a recommendation for or against a reverse mortgage. It explains how the loans work using information from the Consumer Financial Protection Bureau (CFPB) and the U.S. Department of Housing and Urban Development (HUD), and it says plainly where the risks are. A reverse mortgage can make sense for some older homeowners and can be a costly mistake for others. The details of your parent's situation matter.
What a reverse mortgage is
A reverse mortgage lets homeowners borrow money using their home as security, like a traditional mortgage, and the title stays in their name1. The difference is that borrowers don't make monthly mortgage payments. Instead, the loan is repaid when the borrower no longer lives in the home1.
The most common type is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA), part of HUD51. This guide covers HECMs. Some lenders offer private, or proprietary, reverse mortgages with different rules and fewer federal protections, so ask exactly which kind is being offered.
How the balance grows
With a regular mortgage, the balance goes down as you pay. With a reverse mortgage, the amount owed goes up over time because interest and charges are added to the loan balance every month. As the balance increases, home equity decreases1. The CFPB puts it simply: a reverse mortgage is not free money. Borrowed money plus interest plus charges each month equals a rising balance, and the borrower or heirs will eventually have to repay it, usually by selling the home1.
How much your parent can borrow depends on their age, the interest rate and the home's value6. Money can come as a lump sum, monthly payments, a line of credit or a combination, depending on the loan. Each choice affects how fast the balance grows.
Who qualifies for a HECM
HECMs are only for homeowners 62 and older. The other main requirements are2:
- The home must be the principal residence, where your parent lives most of the year.
- The home must be owned outright, or have a low enough mortgage balance to pay off at closing, using the reverse mortgage if needed.
- No delinquent federal debt, such as federal income taxes, though loan money can be used to pay it off.
- Enough money, or a set-aside from the loan, to keep paying property taxes, insurance, maintenance and repairs.
- The home must meet property standards, or repairs must be made first.
- Counseling with a HUD-approved reverse mortgage counseling agency.
Lenders also review whether your parent can keep up with ongoing property charges.
The required counseling session
Before getting a HECM, the borrower must meet with a HUD-approved HECM counselor. The lender must provide a list of approved counselors at the first contact, and the borrower, any non-borrowing spouse and any non-borrowing owner must all receive counseling4. The counselor discusses eligibility, the financial effects of the loan and other options2. If there is a spouse who won't be on the loan, the counselor must explain what happens to them after the borrower dies4. Afterward, the counselor issues a certificate that the lender needs4.
Counseling agencies may charge a reasonable amount, but can't charge someone who can't afford it, and must explain all charges first7. Choose the counselor yourselves from HUD's list, and attend with your parent if they want you there. Counseling is the best moment to ask hard questions without a salesperson in the room.
What a reverse mortgage costs
The CFPB notes that a reverse mortgage is typically more expensive than other home loans7. Costs fall into two groups7:
- Upfront costs. Charges from the lender for setting up the loan, closing costs such as an appraisal and title search, and an initial FHA mortgage insurance premium. These can be paid from the loan, which leaves less money for your parent.
- Ongoing costs. Interest, servicing charges, an annual mortgage insurance premium, and property charges such as taxes and homeowners insurance. Interest and charges are added to the balance each month, so your parent pays interest on past interest.
The CFPB's advice: the larger the balance and the longer the loan runs, the more it costs, so borrow only as much as needed7. Compare offers from more than one lender, and ask each to put all costs in writing.
The real risks
- Less equity for later. Equity goes down as the balance goes up1. That can leave less to pay for assisted living or a nursing home later.
- A long stay in care. If your parent is away more than 12 consecutive months in a hospital, rehab center, nursing home or assisted living, with no co-borrower in the home, the loan may become due3.
- Others in the home. A relative who lives with your parent but isn't a borrower or eligible spouse may have to move out when the loan comes due3.
- High costs. Upfront and compounding costs can be large compared with other options7.
- Scams and pressure. The CFPB warns about contractors who push reverse mortgages to pay for repairs, and about ads that falsely imply VA approval1. See elder financial abuse.
A reverse mortgage may also affect eligibility for means-tested programs if loan money is left sitting in the bank. Ask the counselor and, if Medicaid or SSI may be needed, a benefits counselor or elder law attorney before borrowing.
What happens to a spouse
If both spouses are borrowers, the surviving co-borrower can stay in the home and keep receiving loan payments as long as they meet the loan's obligations8. If a spouse is not on the loan, the picture is riskier. They may be able to stay without paying off the loan only if they qualify as an Eligible Non-Borrowing Spouse under HUD rules, which depends on when the loan was made and the couple's marriage8. An eligible spouse must keep living in the home and meet all loan obligations, including taxes and upkeep4.
If one spouse is younger than 62 or left off the loan for any reason, make sure both of you understand exactly what happens after the borrower dies. Ask the servicer to confirm in writing whose names are on the loan8.
What happens to heirs
When the last borrower dies, the loan must be repaid, usually by selling the home8. Heirs can keep the home only if they repay the loan. If the balance is more than the home is worth, HECM rules protect heirs: they won't have to pay more than 95 percent of the appraised value, and FHA mortgage insurance covers the rest9. Still, the home usually won't pass to children as it would without the loan. Talk openly as a family so no one is surprised.
Reverse mortgages and paying for care
Some families consider a reverse mortgage to pay for in-home care so a parent can age in place. That can work when the parent is likely to stay home for years and can keep up the house. It works poorly when a move to assisted living or a nursing home is likely soon, because a long absence can make the loan due and the home may need to be sold310. Weigh how long your parent can realistically stay home. See aging in place and signs it's time for senior living.
If Medicaid may be part of the plan, learn how the home is treated before borrowing. See can a nursing home take your house and Medicaid estate recovery.
Alternatives to consider first
- Selling and moving somewhere smaller or more manageable. See downsizing tips.
- A traditional home equity loan or line of credit, if your parent can make payments.
- Property tax relief or deferral programs for older homeowners, which many states and counties offer.
- Public benefits and programs. See Medicaid waivers for home care and PACE.
- Family help, such as a written agreement to share costs. See caregiver agreements.
- Long-term care insurance benefits, if your parent has a policy. See long-term care insurance.
The CFPB encourages considering all options before taking out a reverse mortgage6.
Questions to ask before signing
- Is this a HECM or a private reverse mortgage?
- What are all the upfront and ongoing costs, in writing?
- How much will the balance be in five and ten years at this rate?
- Who will pay property taxes and insurance, and is a set-aside needed?
- What happens to a spouse or relative who lives here if my parent dies or moves into care?
- Could this affect Medicaid, SSI or other benefits?
- Is anyone, such as a contractor or adviser, pushing this loan, and why?
Where to get unbiased help
Start with a HUD-approved counselor, chosen from HUD's list rather than the lender's preference45. The CFPB's reverse mortgage pages explain rights, how to handle a default notice, and what to do if taxes or insurance become unaffordable6. If your parent has trouble with a lender or servicer, you can submit a complaint to the CFPB6. For help organizing a parent's money, see managing an elderly parent's finances and power of attorney.
