A reverse mortgage allows homeowners age 62+ to convert home equity into cash without selling the home or making monthly mortgage payments. The loan is repaid when the last borrower no longer lives in the home. You can receive funds as a lump sum, monthly payments, a line of credit, or a combination of these options. Interest accrues only on the funds you use, and the loan balance grows over time as interest is added to the amount borrowed.

When the last borrower passes away, heirs have several options: They can pay off the loan and keep the home (by paying the lesser of the loan balance or 95% of the current appraised value); they can sell the home and use the proceeds to pay off the loan (keeping any excess proceeds); or they can give the home to the lender through a deed in lieu of foreclosure. If the loan balance exceeds the home's value, FHA insurance covers the difference, and neither the borrower's estate nor heirs are responsible for the shortfall.

The amount you can borrow, called the "principal limit," depends on several factors: the age of the youngest borrower or eligible non-borrowing spouse (older borrowers can borrow more); current interest rates (lower rates allow higher loan amounts); and your home's appraised value (up to the FHA lending limit of $1,089,300 as of 2023). Typically, borrowers can access between 40-60% of their home's appraised value.

Reverse mortgage costs include: an FHA mortgage insurance premium (2% of the home's appraised value upfront and 0.5% annually); origination fees (capped at $6,000); third-party closing costs for services like appraisals, title searches, and recording fees; and interest that accrues on the loan balance. Most costs can be financed as part of the loan, reducing out-of-pocket expenses.

Reverse mortgage proceeds generally do not affect Social Security or Medicare benefits because these funds are considered loan advances, not income. However, needs-based benefits like Medicaid or Supplemental Security Income (SSI) could be affected if you keep loan proceeds in your bank account past the month you receive them, as these programs have asset limits. Consult with a benefits specialist before taking a reverse mortgage if you receive needs-based benefits.

You can keep your home with a reverse mortgage as long as you comply with the loan terms, which include: living in the home as your primary residence; keeping the property maintained according to FHA standards; and staying current on property-related expenses like taxes, insurance, and homeowners association fees. If these obligations aren't met, the loan could become due and payable, potentially leading to foreclosure. Lenders must perform a financial assessment to ensure borrowers can meet these obligations.