Reverse mortgages (HECM): how they work and what to know

This guide is for homeowners 62 and older, and their families, who want to understand reverse mortgages before deciding. It explains what a HECM reverse mortgagereverse mortgageA reverse mortgage is a loan secured by your home for older homeowners. In the most common kind, HUD's Home Equity Conversion Mortgage (HECM), the youngest borrower must be 62 or older at closing. Instead of making monthly payments, you receive money; interest and fees are added to the balance each month, so the debt grows and your equity shrinks. The home stays in your name, but you must live in it, pay property taxes and insurance and keep it in good condition. It is repaid when you no longer live there, usually by selling the home. To get a HECM you must receive counseling from a HUD-approved agency.See the full definitionClose is, who can get one, the counseling the regulation requires, what you still have to pay and what happens to your spouse and heirs. No rush: this is a decision to make calmly and with good information.

Minimum age of the youngest borrower at closing

62¹¹

To cancel after closing, in writing

3 business days³

Of the appraisal, the most heirs pay if the debt exceeds the value

95%⁶

HUD's number to find a HECM counselor

(800) 569-4287¹

What a HECM reverse mortgage is

According to HUD, the only reverse mortgage insured by the federal government is the Home Equity Conversion Mortgage, known as a HECM, and it is available only through an FHA-approved lender. It lets you withdraw a portion of your home’s value for maintenance, repairs or everyday living expenses, and you can keep living in your home as long as you stay current on property taxes and insurance.¹

It is like a traditional mortgage in that your home secures the loan and the title stays in your name. The big difference: you make no monthly mortgage payments. The loan is repaid when you no longer live in the home.³

That has a cost. Interest and fees are added to your balance every month, so what you owe rises over time and the home equityhome equityHome equity (or equity) is what your home is worth today minus what you still owe on the mortgages on it. You can borrow against that equity: with a home equity loan, which you receive as a lump sum and which usually has a fixed rate; with a HELOC; or with a cash-out refinance. In all of these the home is the collateral and, if you do not repay, the lender could take it. With a reverse mortgage, the balance grows each month and your equity goes down.See the full definitionClose you have left falls. The CFPB puts it simply: it is not free money. You or your heirs will have to repay it, usually by selling the home.³

Example with real numbers

How a reverse mortgage balance grows

The CFPB's calculation, in words: there are no monthly payments, so everything adds up.

Money you receive from the loan

A

Each month's interest

+ added to the balance

Each month's fees

+ added to the balance

What you owe

Rises every month

Borrowed money + interest + fees each month = a rising balance.³ What you can receive depends on your age, the interest rate and your home's value.¹ To plan the taxes, insurance and repairs you will keep paying, use the family budget.

Run it with your numbersFamily budget

Who can get a HECM

The youngest borrower must be 62 or older at loan closing.¹¹ The home must be the principal residence of each borrower, and of your spouse if they are an eligible non-borrowing spouse.¹² According to the CFPB, in addition:⁴

• You live there most of the year. It is your principal residence.
• You own it outright, or owe little. If you still owe, you must pay that balance off at closing, with your own money or with reverse mortgage funds.
• You don’t owe federal debt, such as federal income taxes or federal student loans, though you can pay it off with reverse mortgage money.
• You can pay the home’s charges. You have money for taxes, insurance, maintenance and repairs, or you set aside part of the loan at closing for them.
• Your home is in good shape. If it doesn’t meet the standards, the lender tells you what to repair first.
• You receive counseling from a HUD-approved agency.

You can also use a HECM to buy your principal residence, if you pay the difference between the HECM proceeds and the price plus closing costs with your own money.¹ In that case, you must move in within 60 days of closing.¹²

Counseling: a step the regulation requires

Counseling is part of the program, not an extra hurdle. Under HUD’s regulation, at the first contact the lender must give you a list of approved HECM counselors with their names, addresses and phone numbers. You, your spouse even if they don’t sign the loan, and anyone else who owns the home must receive counseling. At the end, the counselor gives you a certificate that you hand to the lender.¹³

According to the CFPB, counseling covers your eligibility, what the loan means for your finances and other alternatives.⁴ If your spouse will not sign the loan, the counselor must also explain what they would need in order to stay in the home.¹³

To find a housing counselorHUD-approved housing counselorA HUD-approved housing counselor works at an agency HUD has approved to provide housing counseling: independent, expert advice customized to your situation about buying a home, renting, a missed mortgage payment, a foreclosure or credit problems. The agencies usually charge little or nothing; many serve in Spanish and offer the homebuyer education course several assistance programs require. They are not lenders or real estate agents and sell you nothing. Your county page lists the official agencies with phone numbers.See the full definitionClose who provides HECM counseling, HUD points to its counselor roster or (800) 569-4287. HUD also warns about scam artists who charge thousands of dollars for information that is free from HUD.¹

From the first call to the money

1. 1. You receive the list of counselors

   At first contact with the lender

   The lender must give you the names, addresses and phone numbers of approved HECM counselors.¹³

2. 2. You go to counseling

   Before moving forward with the loan

   You, your spouse even if they don't sign, and any other owner attend; you receive a certificate.¹³

3. 3. The lender reviews your situation

   During the application

   Based on the financial assessment, it may require you to set aside part of the loan for taxes and insurance.¹⁵

4. 4. You close the loan

   Once the youngest borrower is 62

   The home must be your principal residence at closing.¹²

5. 5. Three days to change your mind

   After closing

   You can cancel in writing, without penalty, on most reverse mortgages.³

6. 6. You receive the money

   Under the option you chose

   Monthly payments, a line of credit, a combination or, with a fixed rate, a single lump sum.⁹

How you receive the money

The amount you can withdraw varies from person to person. According to HUD, it depends on the age of the youngest borrower (or the eligible non-borrowing spouse), the interest rate and the lesser of the appraised valuehome appraisalAn appraisal is a written document that gives a professional appraiser's opinion of how much a property is worth. The lender orders it before approving the mortgage, because the home is the loan's collateral and the lender does not want to lend more than it is worth. If the appraisal comes in below the price you agreed, the bank bases the loan on the lower value and you will have to cover the difference, renegotiate the price or walk away if your contract allows it. An appraisal is not an inspection: it measures value, not the home's condition.See the full definitionClose, the HECM FHA limit and the sales price.¹

The regulation offers these ways to receive it:⁹

• Monthly payments for a fixed number of months (term).
• Monthly payments for as long as the loan conditions are met (tenure).
• A line of credit you draw on when and as you choose.
• A combination of monthly payments and a line of credit.
• A single lump sum, available only on fixed-rate HECMs.

What you still have to pay and do

No monthly mortgage payment does not mean no housing costs. The regulation says the borrower must insure the home, keep it in good repair and pay its charges.¹⁰ Those charges are property taxesproperty taxProperty tax is the tax the county, city, school district and other local bodies charge real property owners every year to pay for schools, police, fire and other public services. It is computed on the value the assessor's office assigns to your home, at each body's rate, minus the exemptions you qualify for, such as the primary-residence exemption in many states. If you have a mortgage you normally pay it month by month inside your payment, through the escrow account. It is generally deductible on your federal return if you itemize.See the full definitionClose, homeowners insurancehomeowners insuranceHomeowners insurance pays for losses and damage to your property if something unexpected happens, like a fire or a burglary, and usually includes liability coverage if someone is hurt at your home. Lenders require it as long as you have a mortgage, because the home is their collateral, and almost always collect it inside your monthly payment through the escrow account. The price depends on the location, the rebuilding cost, the deductible and your history. A standard policy does not cover floods or, in many states, earthquakes: those risks are insured separately.See the full definitionClose and flood insuranceflood insuranceFlood insurance is a separate policy that can cover a building, its contents, or both, when flood water causes damage. Most homeowners insurance policies do not cover that damage. Most of these policies are backed by FEMA's National Flood Insurance Program (NFIP) and bought through insurers and agents. If your home is in a high-risk flood area and your mortgage is backed by the federal government, the lender is required to demand it; outside those areas it is optional, but floods happen there too.See the full definitionClose where it applies, plus condominium or homeowners’ association fees. Based on the financial assessment, the lender may require you to set aside part of the loan (a reserve called a LESA) to pay them.¹⁵

The loan becomes due, meaning it must be repaid, if any of these happens:¹⁰

• The borrower dies and the home is not the principal residence of another borrower (except for the deferral for an eligible non-borrowing spouse).
• You transfer all title to the home to someone else.
• The home stops being your principal residence, or you are away for more than 12 consecutive months because of physical or mental illness.
• You don’t pay the property charges or don’t meet another loan obligation.

Your spouse, if they don’t sign the loan

As long as you live in the home, a reverse mortgage does not change who can live with you. If you have a co-borrower, that person can stay in the home even if you die or move out.⁵

If your spouse does not sign the loan, the regulation gives them a protection, called a deferral, if they are an eligible non-borrowing spouse. To qualify, they must have been married to you at closing and stay married for the rest of your life, be named as an eligible non-borrowing spouse in the loan documents, and live in the home as their principal residence. After your death, they have 90 days to establish legal ownership or another legal right to stay for life, and must keep meeting the loan’s obligations, such as taxes and insurance.¹⁴ During the deferral, no more loan payments are made.¹⁰

This is settled at closing: a spouse who did not meet the conditions then cannot become eligible later.¹⁴ If your spouse is not eligible, the counselor must explain that the loan will become due when the last borrower dies.¹³ Children or other relatives who are not co-borrowers have the option to pay off the balance with other money to stay in the home.⁵

What happens with your heirs

When the last borrower dies, the loan must be repaid, and most heirs repay it by selling the home.⁶ HUD’s fact sheet for heirs explains the timeline: the loan must be satisfied within 30 days of the death, and the lender may approve 90-day extensions if the estate or heirs are actively trying to sell or repay. Taxes and insurance remain the estate’s responsibility until the titletitleTitle is your legal right to own and possess a property. The deed is the document showing that the seller transferred that right to you, and legal title is the title that can be documented in public records. As part of the purchase, a title search is done to see whether anyone else has a claim against the home; common claims come from a previous owner's unpaid taxes or from contractors who say they were not paid for work on the home. Title insurance protects you if such a claim shows up later.See the full definitionClose is transferred.²

Heirs have two paths. If they want to keep the home, they must pay the full balance. If they sell it and the balance is more than the home is worth, they can sell for at least 95 percent of the current appraised value, and the lender accepts the net proceeds as payment.² Mortgage insurance covers the rest.⁶ And no one is personally liable for the difference: the regulation says the lender can collect the debt only through sale of the home.¹⁰

If this is you

You are thinking about a reverse mortgage

Counseling is part of the program; HUD points to its counselor roster or (800) 569-4287.¹¹³

You inherited a home with a HECM

Talk to the lender as soon as possible: there are 30 days, with possible extensions, and a sale at 95% of the appraisal satisfies the loan.²

You need to move into a care facility

If you are away from the home for more than 12 consecutive months because of illness, the loan becomes due.¹⁰

You can't afford the taxes or insurance

Look for help right away: local programs, your Area Agency on Aging or a reverse mortgage counselor.⁷

Before you decide: other options and how to avoid scams

The CFPB suggests looking at other options before a reverse mortgage: waiting, because if you take one out too young you could run out of money when you are older; a home equity loan or line of credit, which might cost less but carry their own risks and usually have monthly payments; refinancing; moving to a more affordable home; or lowering your expenses through state and local programs.⁴ The HELOC vs cash-out guide compares two of those options.

Reverse mortgage and home equity line of credit

62 and older

Reverse mortgage (HECM)

• No monthly payments; the balance rises every month.³
• You keep paying taxes, insurance and upkeep.³
• Requires counseling before the loan.¹³

Any age

HELOC or home equity loan

• Might be a cheaper way to borrow.⁴
• Usually has monthly payments.⁴
• Depends on your income and credit.⁴

Both use your home's value: compare calmly and, if you wish, with a counselor.⁴⁸

Using a reverse mortgage to consolidate debt can be risky, according to the CFPB: you swap one debt for a riskier and perhaps more expensive one, and your home equity shrinks when you might need it most.⁸

If you already signed and changed your mind, with most reverse mortgages you have three business days after closing to cancel for any reason without penalty. Notify the lender in writing; the CFPB suggests certified mail with a return receipt. The lender has 20 days to return what you paid.³ If you think you were misled, free legal aidlegal aidLegal aid is the free civil legal help that nonprofit organizations and their lawyers provide to low-income people in civil, not criminal, matters. In housing, that includes representing families facing eviction or foreclosure, alongside matters such as custody, child support, protection from domestic violence and access to benefits. In the United States, the Legal Services Corporation, created by Congress, funds a nationwide network of these organizations; its finder points you to the one in your area. Each sets its own income limits.See the full definitionClose in your area can review your case, if you wish. The contractor scams and deed theft guides cover other scams aimed at homeowners.

Costly mistakes

• Mistake: Thinking that no monthly payment means no housing costs.

  Instead: You keep paying taxes, insurance and repairs; otherwise foreclosure is possible.⁷

• Mistake: Leaving your spouse out of counseling and the documents.

  Instead: Their right to stay is settled at closing, and they must be named in the documents.¹⁴

• Mistake: Taking a reverse mortgage under pressure from a contractor.

  Instead: The CFPB warns it may be a scam: don't let yourself be pressured.³

• Mistake: Paying someone for “information” about reverse mortgages.

  Instead: HUD warns that this information is free; use its counselor roster.¹

• Mistake: Using it to consolidate debts without looking at other options.

  Instead: The CFPB says it can be risky; a counselor can help you compare.⁸

• Mistake: Heirs waiting months without talking to the lender.

  Instead: The loan must be satisfied within 30 days, with possible extensions: call early.²

What to do this week

1. If you are thinking about a reverse mortgage, find a HECM counselor through HUD’s roster or at (800) 569-4287.¹
2. List your housing costs: taxes, insurance, flood insurance if it applies, and fees; you will keep paying them.¹⁵ The family budget tool helps.
3. If you are married and your spouse would not sign the loan, bring your questions to counseling together.¹³
4. Talk with your family about what will happen to the home when you no longer live there.²
5. Compare with other options: waiting, a home equity line of credit, refinancing or moving.⁴
6. If someone pressures you or charges you for information, walk away and read the housing scams guide.³