Do you want to take out a reverse mortgage? First, consider how much it’s going to cost.
Here are the basics, and costs, of reverse mortgages. This article covers:
- Reverse Mortgage Basics – loan requirements, how much you can borrow, and when to pay it back.
- Loan Options – there are different Reverse Mortgage programs to choose from.
- Reverse Mortgage Costs – fees, interest, insurance.
- Example of a reverse mortgage, and the costs associated with it.
Reverse Mortgage – The Basics
Firstly, reverse mortgage is a loan program with no monthly mortgage payments. You can purchase a new home, or refinance your existing home. Secondly, with every reverse mortgage, you get a loan in which you borrow against the equity in your home, turning your home equity into cash.
When you take out a traditional mortgage, you pay down a fraction the loan balance each month, usually over 30 years. In contrast, with a reverse mortgage, you make no payments. Every month, interest and mortgage insurance premiums go onto the loan balance, increasing the amount you owe.
Borrower Requirements
- Minimum 62 years old
- Full-time owner-occupant of the home
- Sufficient equity in home
- Not participating in a property tax postponement program
- Ability to pay for property charges such as general maintenance, property taxes, homeowner insurance, and Homeowner Association (HOA) fees. Most importantly, if you fall behind on any of these bills, the lender might require you to repay your loan.
How Much Can I Borrow?
How much you can borrow depends on many factors, including the age of the youngest borrower, the type of reverse mortgage, the appraised value of the home, current interest rates, and an assessment of ability to pay property charges.
For instance, the older you are, the more valuable your home, and the less you owe on it, the more money you can borrow. Reverse mortgage lenders usually require between 25% – 50% in equity reserves. Most borrowers are eligible to receive between 50% – 75% of their property’s appraised value.
When Do I Need to Pay Back My Reverse Mortgage?
As long as you maintain the property and pay your household bills, you do not pay a monthly mortgage payment.
You are not required to pay back the reverse mortgage until the last surviving borrower:
- Dies.
- Sells the home.
- No longer lives in the home as a principal residence for 12 consecutive months.
All proceeds beyond the outstanding amount belong to your spouse or estate. As a result, any remaining equity can be transferred to heirs. Most importantly, no debt is passed along to the estate or heirs.
Non-Borrowing Spouses
If a borrower dies, his or her non-borrowing spouse may be eligible for a loan deferment. As a result, this spouse would be able to stay in the home without making any mortgage payments.
A spouse is considered eligible for a deferment if:
- he or she remained married to the borrower for the borrower’s lifetime, after obtaining the reverse mortgage, AND
- he or she is identified as a spouse in the loan documents, AND
- the spouse continues to occupy the property as his or her principal residence.
The deferment lasts as long as the surviving spouse continues to occupy the property, and meet any obligations under the mortgage.
“Non-Recourse” Clause
Most reverse mortgages have a “non-recourse” clause: you can’t owe more than the appraised value of your home when the loan becomes due and the home is sold. This is the benefit of the mortgage insurance. You are protected from owing additional money to the lender when you sell the property.
Reverse Mortgage Options
There are three types of reverse mortgages: single-purpose, proprietary, and FHA Home Equity Conversion Mortgages (HECMs), which are federally insured. Here’s a brief description of all three types. The most popular reverse mortgage is the HECM. The rest of this article will cover HECMs in more depth.
Single-Purpose Reverse Mortgage
The single-purpose reverse mortgage is offered by state and local government agencies, and some non-profits. It is designed for low- to moderate-income families. The lender specifies what the reverse mortgage is for, such as maintenance, repairs, utilities, or property taxes.
Proprietary Reverse Mortgage
Proprietary reverse mortgages are private loans, often used by borrowers with more expensive homes. The FHA HECM (described below) has a loan limit of $1,209,750. On the other hand, proprietary reverse mortgage programs can lend you more money. The rates, however, are usually higher. As of 2025, jumbo reverse mortgages offer rates between 7.5-8%.
FHA Home Equity Conversion Mortgage (HECM)
The Home Equity Conversion Mortgage (HECM) is federally-insured by the US Department of Housing and Urban Development’s Federal Housing Administration (FHA). For 2026, the FHA HECM mortgage limit is $1,249,125. There are six different options for HECMs:
- Single disbursement – fixed rate interest, usually a smaller distribution. This program is often used to purchase a new home.
- “Term” disbursement – adjustable-rate interest. Fixed monthly cash advances for a specific time.
- “Tenure” disbursement – adjustable-rate interest. Fixed monthly cash advances for as long as you live in the home.
- Line of credit – adjustable-rate interest. A line of credit that lets you draw down the loan proceeds at any time, in amounts you choose, until you have used up the line of credit.
- A combination of #2 and #4.
- A combination of #3 and #4.
Apply for an HECM
To apply for an HECM, talk to a counselor from an independent government-approved housing counseling agency. These services are either low-cost or free. Call (800) 569-4287 or search for housing counselors online. All HECM borrowers must complete a counseling course.
Costs of a Reverse Mortgage – HECMs
Reverse mortgage costs include closing costs, interest, and mortgage insurance. Reverse mortgage costs are usually financed into the loan. Your lender should provide you with the Total Annual Loan Cost (TALC) rate. The TALC is the projected annual average cost of a reverse mortgage, including all the itemized costs.
Closing Costs
Closing costs include one-time third-party charges, such as an appraisal fee, escrow fees, and title insurance. These closing costs are usually financed into the loan.
Origination Fee
If you take out an HECM, a lender may charge an origination fee. Many lenders do not charge an origination fee. You may choose to pay an origination fee, in exchange for a lower interest rate. The maximum origination fee is the greater of $2,500 or 2% of the first $200,000 of your home’s value, plus 1% of the amount over $200,000. For example, for a home value of $500,000, the maximum origination fee is $5,500. HECM origination fees are capped at $6,000.
Monthly Servicing Fee
An HECM program can charge a monthly servicing fee. Many lenders do not charge a separate servicing fee. The maximum charge is $30 for loans with an annually adjusting interest rate or has a fixed interest rate. If the interest rate adjusts monthly, the maximum charge is $35. At loan closing, the lender sets aside the servicing fee and deducts the fee from your available funds. Each month, the monthly servicing fee is added to your loan balance.
Interest
The largest of the reverse mortgage costs is the interest. Interest is added to your loan balance each month. Fixed interest rates for reverse mortgages are higher than for traditional mortgages. Today, while most borrowers can lock in a rate just below 7% for a traditional mortgage, their reverse mortgage rate may be slightly higher, at 8%.
The interest is added to the loan balance each month, and is calculated based on your current loan balance. This means that your loan balance increases by a slightly larger amount each month. For example, if your current loan balance is $300,000, then this month’s interest (at 8%) is $300,000 x 8% divided by 12 = $2,000.
Mortgage Insurance
The FHA charges mortgage insurance for every HECM. The mortgage insurance guarantees that you will receive expected loan advances, regardless of the current value of your home. These premiums usually go onto the loan balance. Because of that, you don’t need to pay them until the loan comes due.
There are two types of mortgage insurance premiums that go with every HECM: initial mortgage insurance, and monthly mortgage insurance.
Initial Mortgage Insurance Premium
You are responsible for an initial mortgage insurance premium at closing. This premium, which is 2% of the home’s appraisal value, usually adds onto the loan balance. The lender uses the borrower’s age, the property value, and the interest rate to calculate the FHA Principal Limit, which is your maximum loan eligibility amount.
Monthly Mortgage Insurance Premium
Over the life of the loan, mortgage insurance accrues that equals .5% of the current mortgage balance. Because interest adds on to the loan each month, the amount of the monthly mortgage insurance premium also increases. This also tacks onto your loan balance each month. For example, if your current loan balance is $300,000, this month’s mortgage insurance premium is $300,000 x .5% divided by 12 = $125.
Reverse Mortgage Costs – An Example
For example, let’s take a borrower who chose a single disbursement HECM with an 8% fixed interest rate. The property’s value is $400,000. The Equity Reserves is $154,400: this is how much equity the borrower must retain in the property. The cash distribution to the borrower is $232,553.
$400,000 property value minus $154,400 Equity Reserves = $245,600 total loan amount.
Total upfront loan fees: $13,047. $3,047 financing fees + $10,000 initial mortgage insurance premium (2.5% of $400,000 property’s value).
Cash distribution: $232,553 = $245,600 loan amount minus $13,047 fees.
We start with an initial loan balance of $245,600. How will this loan balance increase over time?
I did not include the monthly mortgage insurance premium to this calculation. By simply adding 8% interest to the loan, this means:
Year 1 – The balance will increase to $265,985.
Year 10 – The balance will increase to $545,144.
Year 20 – The balance will increase to $1,210,023.
Property Tax Postponement Program
If you are currently taking advantage of the Property Tax Postponement Program in California, keep in mind that obtaining a reverse mortgage will make all postponed taxes and interest due in full immediately. Read my article about the Property Tax Postponement Program for more information.
The Bottom Line
To sum up, reverse mortgages are a way to own a home without having a monthly mortgage payment. You can use a reverse mortgage to downsize to a smaller home, or to pay off your existing mortgage and keep your home. What’s more, you can spend cash distributions in any way you choose.
Although reverse mortgages offer the benefit of no monthly mortgage payment, it’s important to consider the costs. Be sure to calculate all of the reverse mortgage costs before deciding on a program. Most importantly, remember that your loan balance increases each month. This is because the amount of your interest and mortgage insurance premiums increase every month.
Getting Started
To apply for an HECM, talk to a counselor from an independent government-approved housing counseling agency. These services are either low-cost or free. Call (800) 569-4287. The U.S. Department of Housing and Urban Development oversees the FHA HECMs. As a result, they manage a database of reverse mortgage lenders and counselors.
The National Council on Aging has a free guide for seniors who are considering a reverse mortgage. Download their booklet, “Use Your Home to Stay at Home.” In addition, this booklet explains other housing and home equity options for seniors.
Finally, do you have any questions about reverse mortgage costs? Are you thinking about downsizing? Would you like an estimate of your home’s value? Contact me for more information.
