Reverse mortgages explained in plain English: who they fit, who they don't

Reverse mortgages explained in plain English: who they fit, who they don't

Reverse mortgages have a bad reputation, partly earned and partly not. For the right person they work fine. For the wrong person they're a slow-motion mistake. Here's how to tell which one you are.

Reverse mortgages are one of the most misunderstood products in retirement finance. They have a reputation as predatory, mostly because they were in the 1990s and early 2000s. The current version, the FHA-insured Home Equity Conversion Mortgage, is heavily regulated and works as advertised. It still isn't right for most people.

Here's what one actually is, who it fits, and the warning signs that tell you it's the wrong call.

What a reverse mortgage actually does

A reverse mortgage is a loan against the equity in your home. The lender pays you, not the other way around. You can take the money as a lump sum, as monthly payments, or as a line of credit you draw from when needed.

The loan doesn't have to be repaid until you sell the house, move out permanently, or die. At that point, the loan balance (the money you got, plus accumulated interest and fees) gets paid back from the sale of the house. If the house sells for more than the loan, your heirs get the difference. If it sells for less, FHA insurance covers the gap. Your heirs don't owe anything beyond the home's value.

You have to be 62 or older. You have to live in the home as your primary residence. You have to keep paying property taxes, homeowners insurance, and basic maintenance. Skip any of those and the loan can become due.

How much you can borrow in 2026

The FHA lending limit on Home Equity Conversion Mortgages for 2026 is $1,249,125, up from $1,209,750 in 2025.1 That's the maximum home value FHA will use to calculate proceeds, no matter what your house is actually worth. If your home is worth more than that, the extra equity doesn't get included.

The actual amount you can borrow is much less than the home value. It's based on your age, the interest rate at closing, and the home value up to the FHA cap. As a rule of thumb: a 62-year-old with a $400,000 home and no existing mortgage can typically borrow around 40 to 50 percent of the value. A 75-year-old with the same home can borrow more, closer to 55 to 65 percent. Older borrowers get more because their loan term is statistically shorter.

Who reverse mortgages fit

Three situations where they work.

First. You own your home outright or close to it, you plan to stay in it for the rest of your life, you have limited other retirement savings, and you need monthly income. A reverse mortgage turns equity into a stream of payments without requiring you to sell or move.

Second. You want a backup credit line for emergencies. A HECM line of credit is unusual because the unused portion grows over time at the same rate as the interest charged on the borrowed portion. Open one at 65 with $200,000 of available credit, leave it untouched for 15 years, and it can grow to $400,000 or more. It's a hedge against medical bills or home repairs without locking in interest costs today.

Third. You're using it to buy a smaller home. A HECM for Purchase lets you buy a downsized home with a reverse mortgage covering part of the purchase price. The rest comes from the sale of your current home. You end up in a more manageable place with no monthly mortgage payment.

Who they don't fit

Three situations where they're usually a mistake.

First. You plan to leave the house to your kids. The loan balance grows over time, and the house equity available to heirs shrinks. If passing the home to children is a priority, a reverse mortgage works against that goal. Heirs can still keep the house by paying off the loan, but they'll need to come up with the money.

Second. You might move within five years. Reverse mortgages have substantial closing costs (origination fees, mortgage insurance premiums, title insurance, appraisal). Those costs are typically rolled into the loan, but they hit hard if you only use the loan for a short period. The break-even point is usually 5 to 7 years.

Third. You're being sold one by someone who came to your door, called you out of the blue, or runs daytime TV ads. The FHA program is fine. The actors who push it most aggressively often aren't. Predatory sales are still a problem in this category.

The hidden costs

Reverse mortgages are expensive. Closing costs typically run 5 to 8 percent of the loan amount, much higher than a traditional refinance. Origination fees can be up to $6,000. There's an upfront mortgage insurance premium of 2 percent of the home value and an annual MIP of 0.5 percent of the loan balance.

Interest accrues on the borrowed amount plus the costs you rolled into the loan. That balance compounds. Twenty years in, the loan balance can easily be double what you originally received.

None of this is hidden in the documents. It's just buried under enough paperwork that most people don't read it carefully.

The HUD counseling requirement

Before you can close on a HECM, you must complete a counseling session with a HUD-approved counselor. This is non-negotiable. The session lasts about 90 minutes, costs $125 to $200, and walks through alternatives, costs, and risks.

Take the counseling seriously. Don't pick the counselor your lender recommends. Find one independently through HUD.gov. The counselor's job is to make sure you understand what you're getting into, and a good one will tell you if a reverse mortgage doesn't fit your situation.

Alternatives to consider first

Before signing anything, look at three other options.

Home equity line of credit (HELOC): cheaper closing costs, lower interest, but requires monthly payments and credit qualification

Downsizing: selling the current home and buying smaller, often nets more usable cash and lower ongoing costs

Refinancing the existing mortgage: lower payment, freed-up cash flow, no equity stripped out

These don't fit everyone. But the cheapest way to find out a reverse mortgage is the wrong call is to seriously consider the alternatives first.

What to do next

If a reverse mortgage is on your radar, complete HUD counseling first, before any lender conversation. Counseling is required either way, and doing it first gives you a baseline understanding before someone tries to sell you something.

Get quotes from three lenders. Compare the origination fees, interest rates, and total cost. The cheapest quote isn't always the best one, but a wildly different quote is a red flag.

And if anyone calls you about a reverse mortgage that you didn't initiate, hang up. Every legitimate reverse mortgage starts with you reaching out, not them.

Sources

1. U.S. Department of Housing and Urban Development, Mortgagee Letter 2025-22: 2026 HECM Maximum Claim Amount. hud.gov

2. Reverse Mortgage Lenders Association, 2026 HECM Lending Limits, December 2025. nrmlaonline.org

3. Consumer Financial Protection Bureau, Reverse Mortgages: A Guide for Consumers. consumerfinance.gov

4. AARP, Reverse Mortgage Basics. aarp.org/money/credit-loans-debt/reverse-mortgages