Reverse Mortgages: A Guide to How They Work

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What You Should Know

  • A reverse mortgage is for borrowers 62 years of age or older that have built-up home equity.
  • It allows you to receive lump-sum or monthly payments that you can use for any purpose.
  • You won’t need to make any mortgage payments back to the lender until you move out, sell the home, or die.
  • Interest accumulates and is added to your loan balance, which means that your home equity will decrease over time.
  • The most common type of reverse mortgage are federally-insured HECMs with no minimum credit score or income requirement.

What Is a Reverse Mortgage?

A reverse mortgage allows you to borrow money without needing to make any monthly mortgage payments. Instead of having to pay your bank or mortgage lender every month, they will pay you money based on your home's equity. This allows homeowners to receive a steady stream of income which can be very useful during retirement. Since you won't be making mortgage payments, the mortgage interest that would normally be paid will be added onto your loan balance. This means that your home equity will go down over time as your debt increases.

Most reverse mortgages are only available to borrowers that are 62 years of age and older, however, there are some lenders that allow homeowners as young as age 55 to borrow a reverse mortgage in certain states.

Reverse Mortgage Requirements

  • All borrowers on the home’s title must be at least 62 years old
  • The home must be the borrower’s primary residence
  • You must own at least 50% of your house’s equity. If your mortgage is not fully paid off yet, the reverse mortgage will be used to pay the outstanding mortgage first
  • Homeownership costs are still your responsibility. This sometimes means that you must agree to use some of the funds from the reverse mortgage to pay for things such as property taxes, homeowners insurance, maintenance, and repairs
  • Some types of reverse mortgages (HECMs) require you to meet with an approved counselor from the Department of Housing and Urban Development before applying

HECM Principal Limit Factor Calculator

Calculate Your HECM Borrowing Limit

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Principal Limit Factor 0.417
Principal Limit $83,400.00

HECM Principal Limit Factor Table 2022

AgeInterest RatePrincipal Limit Factor

How Does a Reverse Mortgage Work?

A reverse mortgage works by letting you borrow your home equity without needing to make any payments. This allows homeowners who are at least 62 years old and want to supplement their income during retirement to unlock their home equity without having to sell their home. You can receive a lump-sum payment or schedule to receive recurring payments which you will receive as tax-free cash. Since the cash that you receive is money that you are borrowing, it isn't considered to be taxable income, and so a reverse mortgage will not affect your Social Security or Medicare benefits.

With a reverse mortgage, you can borrow up to your principal loan limit. This limit is a percentage of your home's value that is determined by your age and current reverse mortgage rates. Generally, the older you are, the more you can borrow with a reverse mortgage. Lower reverse mortgage interest rates will also allow you to borrow more money with a higher principal limit. In order to qualify for a reverse mortgage, the borrower must own the house outright and have at least 50% equity in their home.

However, a reverse mortgage isn't free money. That's because the money that you receive is money that you're borrowing against the value of your home. The amount that you borrow will eventually need to be paid back, either by you or your heirs. The balance of the accumulated money borrowed, along with interest and other fees charged, will all become due when the borrowers of the reverse mortgage either die, move away, or sell the house. If the home is sold, some or all of the home sale’s proceeds will go to the lender to repay the reverse mortgage.

Why do they call it a reverse mortgage?

The difference between a mortgage and a reverse mortgage has to do with the direction of payments. With a mortgage, the borrower makes payments to the lender. With a reverse mortgage, the lender makes payments to the borrower. This is the opposite, or “reverse”, of a regular mortgage.

This affects the characteristics of the mortgage. With a regular mortgage, your loan balance decreases as you make payments, meaning that your home equity increases. With a reverse mortgage, your loan balance increases as you receive payments, meaning that your home equity decreases. Reverse mortgage interest will also increase your loan balance. In other words, the more you borrow with a reverse mortgage, the less home equity you will have.

Can I owe more than my home is worth with a reverse mortgage?

Most reverse mortgages are non-recourse loans, which means that you won’t owe more than your home is worth. You can still owe more than your home is worth, such as if your home's value drops significantly, but you won't have to pay the difference between the value of your home and the balance of your reverse mortgage. Instead, mortgage insurance will cover any remaining amount left over after the sale of your home.

Types of Reverse Mortgages

The three main types of reverse mortgages are Home Equity Conversion Mortgages (HECM), Proprietary Reverse Mortgages, and Single-Purpose Reverse Mortgages.

Different types of reverse mortgages: FHA-insured, private, and single-purpose reverse mortgages

Home Equity Conversion Mortgage (HECM)

HECMs are federally insured reverse mortgages and are only offered by Federal Housing Administration (FHA) approved lenders. HECMs are the most popular type of reverse mortgage. While they are insured by the FHA, HECM reverse mortgages are different from FHA loans. For instance, HECMs have no minimum credit score requirement and no income limits. In comparison, FHA loans have a minimum credit score requirement of 580.

The maximum conforming loan limits of FHA loans and HECMs reverse mortgages are the same. However, rather than having the FHA loan limit vary from county to county, HECM loan limits are the same nationwide for all counties. For 2022, the HECM maximum claim amount is $970,800. That's an increase from the $822,375 limit for 2021.

How Much Can I Borrow With a Reverse Mortgage?

The amount you can borrow with a reverse mortgage depends on several factors, such as:

  1. Age of the youngest borrower
  2. Home’s appraised value
  3. Current Interest rates
  4. Type of Reverse mortgage
  5. Amount of any existing mortgage or large debt
  6. Payment plan chosen

The maximum claim amount is the lesser of $970,800 for 2022 or your home value. This means that $970,800 is the absolute maximum that you can borrow with an FHA-insured reverse mortgage. Having a home value greater than $1 million will not allow you to borrow more than the maximum limit of $970,800. Homeowners of high-value homes that want to borrow a greater amount will be able to do so with a proprietary reverse mortgage from a private lender.

The “maximum claim amount” that mortgage insurance premium is based on is the amount that the lender can claim from mortgage insurance should the lender default on the reverse mortgage.

The amount that a borrower can receive as upfront cash is determined on whether they choose to receive the funds as a lump sum payment, with monthly payments, or as a line of credit. In the case of a lump sum payment, 40% of the principal limit would not be available for use and would be categorized as ‘unusable funds’. While this is not the case with monthly payments and a line of credit, there are still limitations on how much you can borrow upfront in the first year. The maximum amount one can borrow in their first year is 60% of the initial principal limit (borrowing limit).

HECM Principal Limit Calculation

The principal limit is the amount that the borrower can actually receive from the reverse mortgage. There are two limits: the initial principal limit and the net principal limit. To calculate your reverse mortgage’s principal limit, you’ll need to know:

  • Age of the youngest borrower
  • Expected reverse mortgage interest rate
  • Appraised home value

After using the principal limit factor table above, you would multiply the lesser of your appraised home value or maximum claim amount with the principal limit factor. This gives you your initial principal limit.

For example, a borrower aged 70 with an expected interest rate of 4% will have a principal limit factor of 0.522. If their home is valued $500,000, then their initial principal limit would be $261,000 (from $500,000 x 0.522). If their home is valued at $2 million, then their initial principal limit would be $506,757 (from the maximum claim amount of $970,800 x 0.522).

If there were no costs and fees, then the initial principal limit would be the amount that the homeowner can borrow. However, there are costs to a reverse mortgage that reduces the amount that can be borrowed. The maximum amount that can actually be borrowed is called the net principal limit. To calculate the net principal limit, you would subtract costs from your initial principal limit. This can include:

  • Initial Mortgage Insurance Premiums (MIP)
  • Closing Costs
  • Upfront Payments to the Borrower
  • Prepaid Servicing Fees
  • Prepaid Property Charges
  • Prepaid Repairs

Let’s use the same example as before for a home valued at $500,000 with an initial principal limit of $261,000. What would be the net principal limit?

  • Home Value: $500,000
  • Initial MIP Rate: 2%
  • Initial MIP Charged: $10,000
  • Origination Fee: $5,000

Assuming there are no closing costs, the initial MIP and origination fee would be a combined $15,000. Subtracting this from the initial principal limit gives you the net principal limit of $246,000.

HECM Principal Limit Growth

Did you know that your reverse mortgage principal limit will grow automatically over time? For reverse mortgage borrowers that choose the line-of-credit option, their principal limit will grow based on their reverse mortgage interest rate and their annual MIP rate.

To calculate the reverse mortgage’s principal limit growth rate, you would add up the interest rate with the annual MIP rate. For example, if the reverse mortgage had an interest rate of 3% and the annual MIP rate was 0.50%, then the unused portion of your principal limit would automatically grow by 3.50% every year! This means that the amount that you can borrow will increase by 3.50% annually.

  • Reverse Mortgage Interest Rate: 3.00%
  • Annual MIP Rate: 0.50%
  • Annual Principal Limit Growth: 3.50%

One thing to note is that only the unused portion of your principal limit would grow every year. The limit also grows monthly, which acts the same as monthly compounding. If you have used up your principal limit, then your limit will not increase automatically. To see how this works, let’s take a look at a reverse mortgage borrower that has a principal limit of $200,000 with a principal limit growth rate of 3.50%.

In the first scenario, the borrower has borrowed $0. Their available borrowing amount remains at $200,000. This means that the full amount of $200,000 will grow at 3.50% compounded monthly. To calculate, find the monthly rate for the interest rate and MIP rate. 3.00% divided by 12 is 0.25%, and 0.5% divided by 12 is 0.0416%. This adds up to the limit growing by 0.2916% every month.

Example of Principal Limit Growth

January 2022$200,000
February 2022$200,583
March 2022$201,168
April 2022$201,755
May 2022$202,343
June 2022$202,933
July 2022$203,525
August 2022$204,119
September 2022$204,714
October 2022$205,311
November 2022$205,910
December 2022$206,511
January 2023$207,113

Next year, the homeowner would be able to borrow up to $207,113, no matter the value of their home. In the second year, they would be able to borrow up to $214,479. After 20 years, they would be able to borrow up to $402,340.

Why does the unused portion of the principal limit increase? The principal limit automatically increases for the unused portion to make up for the fact that interest and annual MIP would be added to the reverse mortgage balance if it were to be used. For example, if annual interest and MIP was 5% and the borrower used the entire limit of $200,000, then the interest and MIP would be added to their loan balance to become $210,232 after one year. The borrower already used their loan limit and wouldn’t be able to borrow any more money. However, since the interest and MIP was added to their balance, they are now borrowing $210,232.

To make up for borrowers that don’t use their entire limit, interest and MIP would be added to increase their principal limit as if they were borrowing the entire amount. This allows a borrower that used $0 in the same year to have a principal limit of $210,232 after one year. In other words, the principal limit or net balance of a borrower would increase at the same rate, whether or not they borrowed any money.

Principal Limit Growth Calculator

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After 10 years, your principal limit would be $283,668.96

Costs of a HECM

Since HECMs are insured, you'll need to pay FHA mortgage insurance premiums (MIPs) both upfront and annually. HECM reverse mortgages have a higher mortgage insurance premium compared to FHA loans.

Current HECM Reverse Mortgage Insurance Premiums for 2022

Initial (Upfront) MIP: 2.00%

Annual MIP: 0.50%

HECM reverse mortgages come with a higher initial mortgage insurance premium rate and a lower annual MIP rate compared to FHA loans. In comparison, FHA loans have an initial MIP of 1.75% and an annual MIP ranging from 0.45% to 1.05%. The annual HECM MIP rate used to be 1.25%. This was lowered in 2017 to just 0.50% to slow down the pace that reverse mortgage balances were growing.

HECM MIPs vs FHA Loan MIPs

HECM Reverse MortgageFHA Mortgage Loans
Initial (Upfront) MIP2.00%1.75%
Annual MIP0.50%0.45% - 1.05%

Source: U.S. Department of Housing and Urban Development as of January 2022

There are also other costs to a HECM, such as your lender’s origination fee as well as closing costs. Closing costs associated with a reverse mortgage can include the cost of an home inspection, home appraisal, and title insurance.

The origination fee is also based on your maximum claim amount, with the minimum fee being $2,500. When getting a HECM, the origination fee will be 2% of the first $200,000 home value and 1% for the amount over $200,000. The maximum origination fee that a HECM reverse mortgage lender can charge is $6,000.

For example, if you were to get a HECM reverse mortgage for a $100,000 home, you will be charged an origination fee of $2,500. For a $300,000 home, the origination fee would be $2,000 (2% of the first $200,000) plus $1,000 (1% of the remaining $100,000 value) for a total fee of $3,000. A home valued $700,000 would have an origination fee capped at $6,000.

Example HECM Reverse Mortgage Origination Fees

Home Value Origination Fee
$100,000$2,500
$300,000$3,000
$500,000$5,000
$700,000$6,000
$900,000$6,000

Lenders can't charge a monthly servicing fee of more than $30 for most HECM reverse mortgages. HECM reverse mortgages that have a monthly-adjusting interest rate can be charged a monthly servicing fee of up to $35.

HECM Reverse Mortgage Maximum Allowed Fees

Maximum Allowed Fee
Origination Fee$6,000
Servicing Fee
  • Fixed interest rate
  • Annually-adjusting interest rate
$30 per month
Servicing Fee
  • Monthly-adjusting interest rate
$35 per month

Calculating Reverse Mortgage Servicing Fees

While servicing fees for reverse mortgages are paid every month, they are also deducted from your principal limit. The deduction from your net principal limit would be the present value of all servicing fees for the life of the reverse mortgage.

For example, let’s say that a borrower is currently 70 years old. It’s common practice to calculate reverse mortgages assuming the borrower lives until they are 100 years old. That means the reverse mortgage has a term of 30 years. Let’s say that the servicing fee charged is $30 per month, the interest rate is 3%, and the annual MIP is 0.5%. That makes the annual rate 3.5%.

$30 charged every month for 360 months (30 years) compounded monthly with an annual interest rate of 3.5% would result in a future value of $19,062. The present value at a discount rate of 3.5% would be $6,791. That means $6,791 would be subtracted from your principal limit to account for the total cost of servicing fees for the life of your reverse mortgage.

HECM Mortgage Insurance Premiums

HECM Initial MIPs are charged based on the reverse mortgage’s “maximum claim amount”, and not the actual amount borrowed. The maximum claim amount is the lesser of your home's value or the maximum HECM lending limit. HECM Annual MIPs are charged based on the outstanding reverse mortgage balance, which would be the amount that you actually borrow.

For example, if you were to get a reverse mortgage loan for a home valued at $500,000, the initial MIP charged would be 2% of $500,000, which would be $10,000. You will be charged $10,000 upfront even if you decide to only borrow $50,000 from your reverse mortgage.

  • Maximum Claim Amount: $500,000
  • Initial MIP Rate: 2%
  • Initial MIP Charged: $10,000

The annual MIP would be based on the outstanding balance of the reverse mortgage, which will include accumulated interest and fees. If your outstanding balance was $100,000, then the annual MIP would be 0.50% of $100,000, which would be $500 for the year. As interest accumulates and your balance grows, the cost of your annual MIP will also grow.

  • Maximum Claim Amount: $100,000
  • Annual MIP Rate: 0.5%
  • Annual MIP Charged: $500

While you won’t have to pay MIP out-of-pocket and can instead add the cost to your reverse mortgage balance, it can still add up to be a significant expense for borrowers that have a low principal loan limit and can only borrow a small amount.

HECM Refinance MIPs

For HECM to HECM Refinances, the initial MIP charged would be 3% of the increase between the old HECM maximum claim amount and the new HECM maximum claim amount, minus the initial MIP paid for with the old HECM. Reasons for a reverse mortgage refinance is to get a higher borrowing limit, which occurs if your home's value has risen, allowing your maximum claim amount to now be higher. Reverse mortgages can also be refinanced to lock in a lower interest rate.

As an example, let’s say that you borrowed a HECM when your home was valued at $300,000. You would have paid an initial MIP of 2% of $300,000, which works out to be $6,000. After a few years, your home’s value has risen significantly and is now valued at $700,000. You want to reset your reverse mortgage borrowing limit to be higher, so you decide to refinance your HECM. How much MIP would you need to pay upfront?

  • Old Maximum Claim Amount: $300,000
  • New Maximum Claim Amount: $700,000
  • 3% of Difference: $12,000
  • Initial MIP Paid: $6,000
  • Refinance MIP: $6,000

The HECM refinance MIP to be paid would be 3% of the difference in your maximum claim amount. Your maximum claim amount has gone up by $400,000, with 3% of this increase being $12,000. Since you had already paid an initial MIP of $6,000 with your existing HECM, you will only need to pay a refinance MIP of $6,000 (from $12,000 - $6,000 already paid).

It’s possible for you to refinance your HECM without having to pay any MIP under certain circumstances. If we take a look at the previous example, let’s say that you paid an initial MIP of $6,000 for a $300,000 home. Your home value has gone up to $500,000. How much MIP would you need to pay?

  • Old Maximum Claim Amount: $300,000
  • New Maximum Claim Amount: $500,000
  • 3% of Difference: $6,000
  • Initial MIP Paid: $6,000
  • Refinance MIP: $0

3% of the $200,000 increase is $6,000. Since you had already paid an initial MIP of $6,000, this means that the MIP now due for your HECM refinance would be $0. You won’t need to pay any additional upfront MIP. You’ll still need to pay your annual MIP dues.

You won’t be able to get a refund if your initial MIP for your old HECM is higher than your new HECM. For example, if you paid $5,000 MIP on your old HECM and your new HECM has a $3,000 MIP, you won’t receive any money back.

HECM Counseling

To ensure that potential reverse mortgage borrowers are well aware of what a reverse mortgage is, how it works, and whether a reverse mortgage is suitable, the FHA requires potential borrowers to attend a reverse mortgage counseling session. Attending a reverse mortgage counseling session is required in order to apply for a reverse mortgage. Your reverse mortgage lender cannot suggest or recommend a specific counseling agency. A full list of HECM counseling agencies can be found on HUD’s website.

HECM counseling is not free. There's also no maximum limit that a HUD-approved counseling agency can charge. This means that HECM counseling can cost $125 or more. However, borrowers with an income that is below 200% of the Federal Poverty level will not be charged a reverse mortgage counseling fee. This fee waiver is required by HUD, however, borrowers may need to provide proof of income.

Comparing Traditional, Purchase, and Refinance HECMs

Traditional and Refinance HECMs are the most common types of FHA-insured reverse mortgages. The third type, a HECM for Purchase loan, allows eligible borrowers to purchase a home using a reverse mortgage. This means that they will be able to buy a home without needing to make any mortgage payments. Instead, the borrowers will need to make a sizable down payment, ranging from 45% to 55%.

This is common for retirees looking to downsize to a smaller home as they will have enough funds from their home sale to pay for a large down payment on their new home. A purchase HECM also allows them to skip having to purchase a new home with a regular home loan only to get a reverse mortgage to pay off the home loan.

In November 2021, 96% of all HECM reverse mortgages were either a traditional HECM or a refinance HECM. Only 4% of HECM mortgages were used to purchase a home.

HECM Reverse Mortgages by Type

Reverse Mortgage TypeNumber of Loans% of all HECMs
Traditional HECM2,22245%
Refinance HECM2,52851%
Purchase HECM1944%

Note: For HECM reverse mortgages originated in November 2021

Since traditional, refinance, and purchase reverse mortgages are all used for different purposes, their average borrowing amounts also differ on average. Refinance HECMs have a higher borrowing limit on average. That’s because reverse mortgage borrowers typically refinance their reverse mortgage when their home value has risen in order to increase their borrowing limit. For November 2021, the average initial principal limit of a refinance HECM was $307,733. That’s higher than the average initial principal limit of a traditional HECM of $245,485.

Reverse Mortgage TypeAverage Maximum Claim AmountAverage Initial Principal Limit
Traditional HECM$432,964$245,485
Refinance HECM$515,752$307,733
Purchase HECM$448,401$251,722

Note: For HECM reverse mortgages originated in November 2021

Proprietary Reverse Mortgage

Proprietary reverse mortgages are offered by private lenders, such as banks and credit unions, and are not federally insured. Unlike HECM reverse mortgages, there is no home value limit for proprietary reverse mortgages. This makes them a more appealing option to homeowners with higher-valued homes over HECM's borrowing limit of $970,800. Another reason why you can borrow more with proprietary reverse mortgages is that since they are not federally insured, they do not have upfront or monthly insurance premiums, leaving more room for borrowing.

HECM vs. Proprietary Reverse Mortgages

HECMProprietary
Federally Insured?YesNo
Counseling Required?YesNo
Lending Limit$970,800No Limit

American Advisors Group Reverse Mortgages

American Advisors Group, known as AAG, is one of the largest lenders of reverse mortgages in the United States. AAG offers both FHA-insured HECM reverse mortgages and proprietary reverse mortgages.

With the AAG Advantage jumbo reverse mortgage, you can borrow up to $4 million without needing to pay any mortgage insurance. The minimum age requirement is also 55 years old in most states, rather than HECM's age requirement of 62 years of age. You will still need to complete a reverse mortgage counseling course to get an AAG reverse mortgage.

AAG Reverse Mortgage Minimum Age Requirement

StateMinimum Age Requirement
Utah
North Carolina
Texas
62
New York
Washington
60
All Other States55

Source: AAG

Reverse Mortgage Funding Reverse Mortgages

Reverse Mortgage Funding (RMF) is one of the largest HECM lenders in the US. With RMF's proprietary Equity Elite reverse mortgage, you can be eligible with a minimum age requirement of 55 in some states. Similar to AAG reverse mortgages, you can borrow up to $4 million, avoid mortgage insurance premiums, and even receive a lender credit to cover most closing costs of the reverse mortgage. However, RMF notes that there is a non-refundable counseling fee of $125 that the lender credit does not cover.

States with a minimum age requirement of 55 years for RMF reverse mortgages include:

  • California
  • Oregon
  • Nevada
  • Arizona
  • Florida
  • Pennsylvania
  • Rhode Island
  • Connecticut
  • Ohio
  • Michigan
  • Montana
  • Colorado
  • New Mexico
  • Illinois
  • Hawaii
  • Washington D.C.
  • Virginia
  • South Carolina
  • Georgia

Single-Purpose Reverse Mortgage

A single-purpose reverse mortgage can be offered by non-profit organizations as well as local and state government agencies. They can only be used for a specific purpose, unlike HECMs which can be used for any purpose. With a single-purpose reverse mortgage, you must use the funds for specific needs. This is usually the least expensive option out of the three, as far as interest and fees go. They’re also easier to qualify for. Some common uses of single-purpose reverse mortgages include:

  • Paying property taxes
  • Home improvements and repairs
  • Insurance premiums

Reverse Mortgage Proceeds and Payouts

Payouts from a reverse mortgage are also called distributions. HECMs offer a number of different ways in which you can receive your funds.

Fixed-Rate Payment Plan

  • Lump-sum - You receive all the available funds together as a lump sum and pay a fixed interest rate (usually higher than the adjustable-rate) on it. This option is mostly used by individuals who are looking to pay off an existing mortgage or large debt.

Adjustable-Rate Payment Plans

The adjustable-rate payment plans offer interest rates that consist of an index plus a margin decided by the lender. The adjustable interest rate can adjust yearly or monthly based on a benchmark interest rate. There are 5 different options available to you if you want to have an adjustable interest rate.

  • Equal monthly payments as long as the borrower lives in the house - This can be the right choice for you if you plan to live in the house for your whole life or a long period of time. The monthly payments are calculated assuming that you will live until the age of 100, however, the payments will continue even if you live longer.
  • Equal monthly payments for a fixed period of time (Reverse Annuity Mortgage) - If you don’t plan to live in the house for a long period of time and have an idea of when you will move out, getting monthly payments for a set number of months can be more suitable for you.
  • Line of credit - With a line of credit, you get to pay interest on only the amount borrowed. While this option provides a whole lot more flexibility to someone in accessing their equity as they wish to, it also presents the risk of using up too much too fast. The benefit of a line of credit is that your borrowing limit will grow automatically every year based on your interest rate and annual MIP. This means that you can borrow more money over time without refinancing.
  • Equal monthly payments for as long as the borrower lives in the house + a line of credit - This option gives the flexibility of not being restricted to only your monthly payment if you experience larger expenses during certain months. How much to allocate to the payments and line of credit is up to you.
  • Equal monthly payments for a fixed period of time + a line of credit - You will be able to get higher monthly payments than with the life-long plans and you can combine these payments with access to a line of credit.

Reverse Mortgages Pros and Cons

To assess if a reverse mortgage is the right decision for you, it is important to be aware of the benefits and drawbacks that reverse mortgages present.

Pros

  • A good way to have access to cash and meet basic living needs
  • You keep the house’s title and can continue living there
  • You do not need to pay for what you borrow as long as you continue to live in the house
  • Even though your credit history will be reviewed in a financial assessment, there are no credit score or income requirements
  • Non-borrowing spouses can continue to live in the property upon the borrower’s death
  • Neither you nor your heirs are liable for any loan amount that exceeds the value of the house
  • There are options available to heirs who want to keep the house, such as purchasing the house at the lower of 95% of the house’s appraised value or the loan balance. They can also choose to refinance the loan.

Cons

  • A large portion of the equity goes to expenses such as interest fees, upfront, monthly insurance premiums, and closing costs, which take up from what you can borrow
  • You will still have to continue paying for homeownership costs such as property taxes, maintenance, and homeowner’s insurance
  • You will probably not be able to pass down the house to your heirs
  • You might outlive your loan’s proceeds
  • The loan balance might come due for different reasons, such as if you don’t live in the house for more than 6 months or if you unable to pay homeownership costs, such as property taxes
  • If you pass away and you live with a roommate, friend, or relative, they won’t be able to continue living in the house

Reverse Mortgage Tax Implications

The money you borrow from a reverse mortgage is tax-free, that is it won’t be counted as income, but rather as an advanced loan. However, the interest charged on the reverse mortgage is not tax-deductible. Since the interest is not being paid, but rather added to your outstanding loan balance, you won’t be able to claim any deductions throughout the years. Only when you repay the loan and all of its interest will you be permitted to write off the reverse mortgage’s interest as an expense when filing your income taxes.

Reverse Mortgage Alternatives

There are a few options for you to choose from other than a reverse mortgage:

  1. HELOC: A home equity line of credit (HELOC) allows you to borrow funds based on home equity. It works like a credit card where funds can be borrowed, repaid, and borrowed again. Most lenders allow you to borrow up to 80% of the home value. You can determine your monthly payment using our HELOC payment calculator.
  2. Home Equity Loan: A home equity loan works similarly to a HELOC where funds are borrowed based on the equity owned in the home. However, instead of it being a credit facility, you receive the funds as a lump-sum amount at the start of the loan. Closing costs are lower for home equity loans than reverse mortgages.
  3. Mortgage Refinancing: Refinancing a mortgage is the process of getting a new mortgage with better terms and paying off your existing mortgage balance. You can also borrow additional funds by taking out a cash-out refinance. Be sure to check out if refinance closing costs are not beyond the budget as it can be 3% - 5% of the loan balance.
  4. Downsizing: Instead of borrowing funds, you can choose to sell your existing home and buy a new smaller home that will have fewer maintenance costs. The difference in funds can be used for other expenses. Bridge loans can be used if you want to buy and sell a house simultaneously.

HECM Reverse Mortgage Statistics for 2022

Are fixed rates or adjustable rates more popular?

Most HECM reverse mortgages have an adjustable interest rate. In fact, of the 4,948 HECM reverse mortgages issued in November 2021 across the country, 4,609 of them had an adjustable interest rate while only 339 had a fixed interest rate. This means that just over 93% of newly-originated HECM reverse mortgages have an adjustable rate!

HECM Reverse Mortgage Rates by Type

% of all HECM Reverse MortgagesAverage Interest Rate
Fixed HECM Rates7%3.35%
Adjustable HECM Rates93%2.20%

Average Reverse Mortgage Interest Rate

The average reverse mortgage interest rate is 2.28% as of November 2021, according to U.S. Department of Housing and Urban Development data for HECM reverse mortgage loans. That’s based on the average interest rate of the 4,948 HECM reverse mortgages issued in the month of November 2021 nationwide. The overwhelming majority of these, over 93%, had an adjustable interest rate.

The average interest rate of fixed HECM reverse mortgages was 3.35%.

The average interest rate of adjustable HECM reverse mortgages was 2.20%.

List of HECM Reverse Mortgage Lenders

LenderMaximum Claim AmountInitial Principal Limit(s)
1ST AMERICAN HOME LOANS LLC$235,000$125,960
1ST USA REVERSE MORTGAGE, LLC$1,332,375$718,806.75
55 PLACES MORTGAGE, LLC$1,939,270$1,069,941.04
719 LENDING INC.$2,437,500$1,422,529.5
A BETTER LIFE MORTGAGE, LLC$973,000$548,550
A BETTER MORTGAGE OF FORT COLLINS LLC$500,000$277,500
A COLORADO REVERSE MORTGAGE LLC$886,500$486,355.5
A NEW MEXICO REVERSE MORTGAGE LLC$1,095,000$625,020
AAA NORTHEAST BANK$780,000$410,280
ABACUS LENDING LLC$742,000$411,810
ABBEY MORTGAGE OF OCALA, INC.$337,000$203,214
ABIDE RETIREMENT$505,000$301,990
ABSOLUTE HOME MORTGAGE CORP$809,000$452,079
ABSOLUTE HOME MORTGAGE CORPORATION$1,140,000$699,660
ACADEMY MORTGAGE CORPORATION$3,058,365$1,797,832.33
ACCESS FINANCIAL MORTGAGE CORP.$525,000$271,425
ACCESS G T MORTGAGE INC.$375,000$230,250
ACCESS REVERSE MORTGAGE CORPORATION$868,500$521,269
ACCLAIM MORTGAGE INC.$642,000$384,558
ACCUTRUST MORTGAGE, INC.$395,000$274,130

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Where Are Reverse Mortgages Most Popular?

The city with the highest number of reverse mortgages is Denver, Colorado, with 1,203 reverse mortgages originated in 2021. That makes up 7.9% of all reverse mortgages in 2021. Runner-up is Phoenix, Arizona, with 1,148 reverse mortgages for 7.6% of the total, followed by Santa Ana, California with 1,035 reverse mortgages for 6.8% of the total.

The state with the highest number of reverse mortgages is California. Six out of the top ten cities for reverse mortgages are in the State of California, with these six cities making up almost 25% of the nation’s reverse mortgages.

One outsized city for reverse mortgages is Boise, Idaho. Despite having a population of just 235,684 as of 2020 according to the US Census, the city of Boise was home to 413 new reverse mortgages in 2021. That’s 2.7% of the national total and is more than other major U.S. cities. For example, Boston had 153 reverse mortgages, New York City had 212 reverse mortgages, Chicago had 110 reverse mortgages, and Dallas had 240 reverse mortgages in 2021.

CityNumber of New HECM Reverse Mortgages% of National Total
Denver1,2037.9%
Phoenix1,1487.6%
Santa Ana1,0356.8%
Los Angeles9486.2%
Salt Lake City8275.4%
Seattle6544.3%
Sacramento5993.9%
San Francisco5583.7%
Portland4783.1%
San Diego4442.9%
Total15,200100%

Source: HECM Endorsement Summary Reports

Reverse Mortgage Borrower Characteristics

The latest year that the U.S. Department of Housing and Urban Development collected information on HECM borrower characteristics was in 2012. Among the statistics seen in the report is the rapid growth of the reverse mortgage industry in the run up to the 2007-2008 financial crisis.

From 2003 to 2012, the percentage of reverse mortgages being insured increased from 29% of reverse mortgages to 99% of reverse mortgages being insured by the federal government.

Number of Insured vs. Uninsured Reverse Mortgages

YearTotal Reverse MortgagesInsured Reverse Mortgages% of Reverse Mortgages Insured
200318,0845,21029%
200437,79015,25040%
200543,08224,74857%
200676,28055,37373%
2007107,36788,79883%
2008112,01398,67288%
2009114,639103,06590%
201078,75872,78492%
201173,09370,22396%
201254,67653,92899%

Source: HECM Characteristics Report last updated in 2012

Historically, single female borrowers made up a larger proportion of reverse mortgage borrowers compared to single male borrowers. The average borrower age had already been steadily decreasing from an average borrower age of 74 years old in 2003 to 72 years old in 2012.

Reverse Mortgages Borrowers: Average Age and Gender

YearAverage Borrower AgeSingle Female (% of Borrowers)Single Male (% of Borrowers)Multiple Borrowers (% of Borrowers)
200374.348.6%14.2%37.2%
200474.348.6%15.2%36.2%
200573.846.0%16.1%37.9%
200673.844.5%16.7%38.8%
200773.544.6%18.2%37.2%
200873.143.8%20.6%35.6%
200972.941.2%21.8%37.0%
201072.942.6%21.8%35.6%
201172.241.1%21.3%37.7%
201271.940.1%21.7%38.2%

Source: HECM Characteristics Report last updated in 2012

When looking at historical reverse mortgage balances, a clear trend is that the average reverse mortgage balance was higher than the average initial principal limit leading up to the 2008 housing crisis. This means that reverse mortgage borrowers owed more on their reverse mortgage than the maximum that they could take out. After 2008, mortgage balances remained lower than initial principal limits.

Historical Reverse Mortgages: Average Rates, Limits, and Balances

YearAverage Interest RateAverage Property ValueAverage Maximum Claim AmountAverage Initial Principal LimitAverage Reverse Mortgage Balance
20035.4%$197,553$165,922$131,286$137,358
20045.8%$219,435$182,199$133,905$140,858
20055.7%$254,864$206,041$144,386$159,580
20066.0%$289,660$235,616$158,892$169,712
20076.0%$261,939$229,332$155,650$155,839
20085.4%$239,337$216,407$153,719$145,432
20095.5%$283,304$263,095$183,960$174,524
20105.7%$279,880$266,314$175,492$175,324
20115.1%$261,454$249,103$161,139$149,545
20124.9%$251,953$239,822$158,228$131,986

Source: HECM Characteristics Report last updated in 2012

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