How Does Reverse Mortgage Work in 2025?

Reverse Mortgage is a term widely used for elderly people. So, what is Reverse Mortgage? It is a home loan which can only be applied for by people who are 62 and older. It allows the homeowners to borrow a loan and use their house as security or collateral.

There is a twist to this kind of loan. It can’t be paid while the homeowners are still in the house used as collateral. It can either be paid by the homeowners or heirs and this is usually done by selling the house.

Note: The property’s name would still be with the homeowners during the loan duration.

Types of Reverse Mortgage Loans

The most popular type of Reserve Mortgage loan is the Home Equity Conversion Mortgage (HECM) because it is insured by the government which gives them a little more trust than the other types, so without any further ado let’s get right into it:

1. The Home Equity Conversion Mortgage (HECM):

These are the most popular types of reverse mortgage loans. They are the only ones backed by the government [The U.S. Department of Housing and Urban Development (HUD)]. This type of loan is only available to residents who are above 62 years. They must have their residence or have paid part of their mortgage.

Who benefits from HECM?

HECM is very beneficial for government retirees who want to use the equity available in their homes to generate income. After you have applied for a reverse mortgage using HECM, you can receive your loan in a huge amount at once. You can also receive it as a monthly payment or as a line of credit.

Note: Before applying for a HECM loan, you must receive counseling. The counselor must be approved by the HUD. The counseling session is not free as you must pay.

Here are the things the lender will do before giving out the loan:

1. The lender will underwrite the loan to ensure the borrower meets all of the government requirements.
2. The borrower must sign an agreement. It states that they will keep up with the expenses associated with the property. These include property tax and maintenance costs.

Once given the loan, no payment is expected to be made to the lender until one of these two things happens:

1. The property is sold;
2. The borrower dies then the mortgage is paid by the estate.

Obligations to be fulfilled before you can be able to borrow a loan using HECM

• The borrower must be 62 years old or older.
• The borrower must be the owner of the said residence.
• The property must be your principal residence.
• Be willing to maintain the property mentioned and cater for all its expenses.
• The borrower must be aware of all federal debt.

Demerits of HECM

• The borrower must pay counseling fees from a HUD-approved counselor.
• The loan origination fee could amount to $6000.
• The interest on the loan is usually high.
• The servicing fees attached to the loan are also high.

2. Proprietary Reverse Mortgage:

This type of mortgage can be classified as the opposite of HECM. It is not guaranteed by the government. It is regulated by the HUD or the Federal Housing Administration (FHA). This type of loan is offered by private lenders.

Who benefits from it?

In this type of loan, having a benefit isn’t a must. It depends on the lender who decides if you or he will benefit from the loan. So, don’t be too excited when applying.

Users usually apply for this type of loan because they couldn’t meet the requirements of receiving a loan from HECM. However, there is one similarity. Both loans’ underwriting processes are similar. In Proprietary Reverse Mortgage, you don’t have to pay a counseling fee because it isn’t a requirement.

Note: This loan is also used by borrowers whose residence value exceeds the limit of the HECM loan.

Disadvantage of the Proprietary Reverse Mortgage

The only disadvantage of the Proprietary Reverse Mortgage is due to its private nature and the non-involvement of government. The interest attached to the loan by the lender is always high. This is understandable because he/she needs to be compensated for the additional risk incurred by giving you the loan.

3. Single-Purpose Reverse Mortgage:

This type of loan is synonymous with the Proprietary Reverse Mortgage. Neither of them is guaranteed or insured by the government. The only difference with this type of loan is that it is given by the local government and Non-profit organizations. This type of loan is given with the condition that it is used for a single purpose. This could include payment of unpaid property taxes or home repairs.

Who benefits from it?

This type of loan is used for either a project or to pay for unpaid expenses on the house. This type of loan is very peculiar. The remaining two can’t be used to fix retirement assets. They also can’t be used to pay for outstanding or ongoing expenses.

In this type of loan, the borrower doesn’t need to obtain much equity in their residence. The lender will use a title company to enforce the use of proceeds.

Note: This type has some stringent conditions. If the lender is using a Single-Purpose Reverse Mortgage, they will demand that the payment go directly to the payee/borrower.

Benefits of Single-Purpose Reverse Mortgage

This loan is very beneficial to the borrower as they would only need to pay a one-off expense. This type of loan doesn’t require the borrower to pay a lot of fees to access the equity. They also have access to the loan funds without needing a high-fee unsecured loan product.

Demerits of Single-Purpose Reverse Mortgage

The only demerit of this type of loan is the limited access to the use of funds. The borrower is only allowed to use the loan he got to settle the designated use. If another emergency comes up, the loan can’t be used. The terms will have to be adjusted or the borrower has to apply for a new loan.

How Does Reverse Mortgage Work?

When using a traditional mortgage, the bank gives you a huge sum. You are obliged to pay it back with interest until the loan is paid down to $0. Well, when using a Reverse Mortgage, the lender provides payment options. You can receive a lump sum, monthly payments, or a line of credit.

When using Reserve Mortgage, the amount you owe increases over each month and your home equity decreases over time. The special advantage attached to this loan is that during the loan duration, the title of your home is kept with you. You don’t need to pay the balance until you move out from that residence or die.

Over time, as the homeowner moves out, he or she will have to sell the house. The proceeds from the sale will be used to pay off the debt. However, if there is no equity left over on the house, the estate will take ownership of the property.

For owners with loans exceeding the house’s value, the heirs are not responsible for the difference. The heirs can decide to pay off the mortgage inherited from their parents if they want to keep the house. They must refinance the mortgage to do so.

Advantages of Reverse Mortgage Loans

1. It is very helpful to secure a person’s retirement:

For residents who didn’t save much during their working stage, or have limited investments, a Reverse Mortgage is advisable. This is particularly true for those whose wealth is primarily built up in their homes. Reverse Mortgage helps retirees turn their liquid assets into cash. This cash can be used to pay for expenses during their retirement years.

2. It still provides the opportunity for the borrowers to live in the house:

Most retirees who are unexposed to this scheme usually sell their houses to liquefy their assets. However, that isn’t necessary for Reverse mortgages. The property can still be yours while you make your cash. 

This scheme also assists you. It reduces the possibility of being priced out of your neighborhood if you had to move.

3. It helps to pay off your existing home loan:

Before taking a Reverse Mortgage loan, your home may not be paid off. When you have collected the loan, it can be used to pay off the existing home loan. This action frees up money to pay for other expenses. 

4. No Tax Liability attached:

The IRS doesn’t consider Reverse Mortgages as income. Instead, they are seen as a loan advance, which means those funds can’t be taxed. Other retirement income such as 401 (k) or IRA is usually taxed.

5. There is still protection on your loan even if the balance exceeds the home’s value:

If the value of your home falls below the total amount owed, your heirs have no obligation. They are not required to repay the balance.

Disadvantages of Reverse Mortgage Loans

1. You could lose your home to foreclosure:

People who want to qualify for a Reverse Mortgage need to afford their property taxes. They must also pay homeowners insurance, HOA fees, and other home-related expenses. If you can’t manage these expenses, you could lose your home to foreclosure. Defaulting on your loan terms at any time could also result in losing your home.

2. It could impact a retiree on his/her other benefits:

A Reverse Mortgage can impact a retiree’s ability to qualify for benefits. These benefits include those attached to retirees such as Medicaid or Supplemental Security Income (SSI). Before you apply for any reverse mortgage loan, discuss with a benefits specialist. This will help ensure that none of your entitled benefits is affected.

Other disadvantages include:

1. They are complicated;
2. It is not free;
3. Your heirs could inherit less.

Conclusion: How Does Reverse Mortgage Work?

A reverse mortgage is a type of loan designed for homeowners aged 62 and older. It allows them to convert home equity into cash without selling their home. A reverse mortgage pays you either in a lump sum. Alternatively, it can pay you in monthly payments or as a line of credit.

Key Points About Reverse Mortgages:

• The loan does not require monthly payments, but the homeowner must continue paying property taxes, homeowners insurance, and maintenance costs.
• The loan is repaid when the homeowner sells the home, moves out permanently, or passes away.
• The most common type is the Home Equity Conversion Mortgage (HECM), which is federally insured.
• Borrowers must go through HUD-approved counseling before getting a reverse mortgage.

Is a Reverse Mortgage Right for You?

A reverse mortgage can provide financial relief for retirees needing extra income. However, it reduces home equity and may impact your heirs. Before considering one, explore all alternatives and speak with a financial advisor.