[Last updated July 8, 2025]

An older adult man and woman are walking in front of their house to greet their granddaughter, a young girl who is running toward them with her arms in the air.
Reverse mortgages are financial tools that allow older adult homeowners to borrow against the equity in their homes. Learn the details below. Photo Credit: iStock.com/gorodenkoff

Older adult homeowners who want access to cash may be able to use a reverse mortgage, which offers options to homeowners who would benefit from the cash value of their homes. A homeowner who is 62 or older and has considerable home equity may be able to use this type of loan to borrow against the value of their home. 

The loan must be paid back once the homeowner sells the home, moves out, or passes away. In the meantime, the homeowner may be able to use the funds to cover various expenses, such as senior care costs or long-term care insurance premiums.

If you or a loved one is considering a reverse mortgage to help finance living or medical expenses, here’s what you need to know about how it works, as well as the pros and cons of getting one. 

How do reverse mortgages work?

In a reverse mortgage, the lender makes payments to the homeowner instead of the other way around, as in a typical mortgage. Those payments are not taxable by the IRS even if a homeowner decides to use them as a form of income. Interest, fees, and premiums are typically included in the loan balance, which keeps the homeowner from having to pay anything upfront. 

As time goes on, the equity of the home — which the owner has borrowed against — goes down and their debt goes up. The home also acts as collateral for the loan itself. 

How do borrowers get the reverse mortgage funds?

The ways that a borrower receives the funds may vary based on the type of mortgage they secure. According to Investopedia, “Most people choose a home equity conversion mortgage (HECM), which is sponsored by the government.” HECMs offer a number of methods by which lenders can disburse money to the borrower. These methods include

  • Lump sum: With a lump-sum payment, you receive the entire loan amount at once when your loan process is complete.
  • Equal monthly payments (annuity): For this option, the homeowner can receive monthly payments as long as they live in the home. 
  • Term payments: The borrower receives monthly payments for a set period of time.  
  • Line of credit: The borrower can have access to all the money at any time and will only be charged interest on the money they actually borrow from the line of credit. For example, if the borrower never borrowed against the credit line, they would not have to pay any interest. 
  • Equal monthly payments plus a line of credit: This option combines both the monthly payments and the line of credit option. It ensures the borrower has steady monthly payments coming in but also provides them with backup credit they can borrow against in case they need it. 
  • Term payments plus a line of credit: The borrower can combine term payments with a line of credit. Instead of indefinite monthly payments, they receive monthly payments within the term they set, and they have the line of credit to access at any time. 

Types of reverse mortgages

There are three main types of reverse mortgages: home equity conversion mortgages (HECMs), proprietary reverse mortgages, and single-purpose reverse mortgages. Let’s take a closer look at each type.

Home equity conversion mortgages (HECMs)

The Consumer Financial Protection Bureau stated that a home equity conversion mortgage is “the most common type of reverse mortgage.” HECMs are federally insured mortgages that tend to cost more upfront. However, the funds can be used for any purpose. You can also choose any of the payment types with this kind of reverse mortgage. Only Federal Housing Administration-approved lenders can offer these kinds of loans.

Proprietary reverse mortgages

Proprietary reverse mortgages are loans from private lenders that are not federally insured. They allow you to obtain a larger loan advance if your home is highly valued.

Single-purpose reverse mortgages

Single-purpose reverse mortgages are loans offered by nonprofits and some state and local government agencies. They are generally less expensive than HECMs and proprietary reverse mortgages. This is the most limited-use mortgage, as it can only be used to cover one specific purpose, such as home repairs. The lender must approve of the purpose for the loan. This option isn’t available in every state.

Benefits and risks

Reverse mortgages can be a source of cash, but they aren’t the right choice for everyone. There are benefits and drawbacks to reverse mortgages, so it’s important to consider each to decide if this type of loan works for your situation.

Benefits

  • Right to cancel within three days: With most reverse mortgages, borrowers can decide to cancel within three days. This is known as the right of rescission, which you can exercise without penalty. 
  • No need to make monthly payments toward the loan balance: This aspect of reverse mortgages offers the borrower peace of mind and flexibility in a time when an older homeowner likely has a limited income. 
  • Flexible use of funds (in most cases): Most reverse mortgage options (excluding single-purpose reverse mortgages) allow the borrower to use the funds for a variety of expenses, including some of the most common expenses for older homeowners.  
  • Non-borrowing spouses can remain in the home after the borrower dies: This flexibility can be a comfort for borrowers who want to ensure their spouse is provided for even after they pass. 

Risks

  • Scams: Reverse mortgage scams can target older homeowners. For example, some lenders claim that the Department of Veterans Affairs offers “no repayment” reverse mortgages. According to the Consumer Financial Protection Bureau, the VA “does not offer any reverse mortgage loans.” Be wary of other fraudulent practices by talking with financial and real estate experts you trust.
  • Sales pitches: If you’re speaking with a private lender, their advice might not have your interest at heart. After all, it’s their job to sell you on a reverse mortgage. The Federal Trade Commission recommends speaking with an independent, government-approved housing counseling agency to make sure you receive impartial advice. 
  • Possibility of foreclosure: With a reverse mortgage, homeowners are still required to pay property taxes and home insurance. Although borrowers don’t have to make any payments, they must live in the home and care for it so it will stay at market value. 
  • The loan becomes due if you move out: If you have a reverse mortgage, at least one homeowner must remain living in the home. This means that if you need to move out permanently, for example to live at a senior care facility, you will need to repay the loan.

If you think you could benefit from taking out a reverse mortgage on your home, reach out to ElderLife Financial to find out which option is the best for you. 

This information is for educational purposes and is not legal, financial, tax, or investment advice. It should not be substituted for information from professionals authorized to practice in your area. You should always consult a suitably qualified professional regarding your specific situation.