Reverse Mortgages:

Get the Facts Before Cashing In On Your Home’s Equity

Whether seeking money to finance a home improvement, pay off a current mortgage, 

supplement their retirement income, or pay for 

healthcare expenses, many older Americans are 

turning to “reverse” mortgages. They allow older 

homeowners to convert part of 

the equity in their homes into 

cash without having to sell their 

homes or take on additional 

monthly bills.

In a “regular” mortgage, 

you make monthly payments 

to the lender. But in a “reverse” 

mortgage, you receive money 

from the lender and generally 

don’t have to pay it back for as long as you live in 

your home. Instead, the loan must be repaid when 

you die, sell your home, or no longer live there as 

your principal residence. Reverse mortgages can 

help homeowners who are house-rich but cash-poor 

stay in their homes and still meet their financial 

obligations.

To qualify for most reverse mortgages, you must 

be at least 62 and live in your home. The proceeds 

of a reverse mortgage (without other features, like 

an annuity) are generally tax-free, and many reverse 

mortgages have no income restrictions.

Three Types of Reverse 

Mortgages

The three basic types of reverse mortgage are: 

single-purpose reverse mortgages, which are offered 

by some state and local government agencies 

and nonprofit organizations; 

federally-insured reverse 

mortgages, which are known 

as Home Equity Conversion 

Mortgages (HECMs), and are 

backed by the U. S. Department 

of Housing and Urban 

Development (HUD); and 

proprietary reverse mortgages, 

which are private loans that are 

backed by the companies that develop them.

Single-purpose reverse mortgages generally have 

very low costs. But they are not available everywhere, 

and they only can be used for one purpose specified 

by the government or nonprofit lender, for example, 

to pay for home repairs, improvements, or property 

taxes. In most cases, you can qualify for these loans 

only if your income is low or moderate.

HECMs and proprietary reverse mortgages

tend to be more costly than other home loans. The 

up-front costs can be high, so they are generally most 

expensive if you stay in your home for just a short 

June 2005

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time. They are widely available, have no income 

or medical requirements, and can be used for any 

purpose. 

Before applying for a HECM, you must meet 

with a counselor from an independent governmentapproved housing counseling agency. The counselor 

must explain the loan’s costs, financial implications, 

and alternatives. For example, counselors should 

tell you about government or nonprofit programs 

for which you may qualify, 

and any single-purpose 

or proprietary reverse 

mortgages available in your 

area. 

The amount of money 

you can borrow with a 

HECM or proprietary 

reverse mortgage depends 

on several factors, including 

your age, the type of reverse 

mortgage you select, the appraised value of your 

home, current interest rates, and where you live. In 

general, the older you are, the more valuable your 

home, and the less you owe on it, the more money 

you can get.

The HECM gives you choices in how the loan 

is paid to you. You can select fixed monthly cash 

advances for a specific period or for as long as 

you live in your home. Or you can opt for a line 

of credit, which allows you to draw on the loan 

proceeds at any time in amounts that you choose.

You also can get a combination of monthly payments 

plus a line of credit. 

HECMs generally provide larger loan advances 

at a lower total cost compared with proprietary 

loans. But owners of higher-valued homes may get 

bigger loan advances from a proprietary reverse 

mortgage. That is, if you have a higher appraised 

value without a large mortgage, then you may likely 

qualify for greater funds. Location (for example, your 

neighborhood) is only one part of the determination 

of appraised value.

Loan Features

Reverse mortgage loan advances are not taxable, and 

generally do not affect Social Security or Medicare 

benefits. You retain the 

title to your home and do 

not have to make monthly 

repayments. The loan must 

be repaid when the last 

surviving borrower dies, sells 

the home, or no longer lives 

in the home as a principal 

residence. In the HECM 

program, a borrower can 

live in a nursing home or 

other medical facility for up to 12 months before the 

loan becomes due and payable.

As you consider a reverse mortgage, be aware 

that:

n Lenders generally charge origination fees and 

other closing costs for a reverse mortgage. 

Lenders also may charge servicing fees during 

the term of the mortgage. The lender generally 

sets these fees and costs. 

n The amount you owe on a reverse mortgage 

generally grows over time. Interest is charged 

on the outstanding balance and added to the 

amount you owe each month. That means your 

total debt increases over time as loan funds are 

advanced to you and interest accrues on the 

loan. 

In a “reverse” mortgage, you 

receive money from the lender and 

generally don’t have to pay it back 

for as long as you live in your home.

 FTC Facts For Consumers
n Reverse mortgages may have fixed or variable 

rates. Most have variable rates that are tied to a 

financial index and will likely change according 

to market conditions.

n Reverse mortgages can use up all or some of the 

equity in your home, leaving fewer assets for you 

and your heirs. A “nonrecourse” clause, found in 

most reverse mortgages, prevents either you or 

your estate from owing more than the value of 

your home when the loan is repaid.

n Because you retain title to your home, you 

remain responsible for property taxes, insurance, 

utilities, fuel, maintenance, and other expenses. 

So, for example, if you don’t pay property taxes 

or maintain homeowner’s insurance, you risk the 

loan becoming due and payable.

n Interest on reverse mortgages is not deductible 

on income tax returns until the loan is paid off 

in part or whole. 

Getting a Good Deal

If you are considering a reverse mortgage, shop 

around to compare your options and the offered 

terms. Learn as much as you can about reverse 

mortgages before you talk to a counselor or lender. 

It will help you ask more informed questions, which 

could lead to a better deal.

n If you want to make a home repair or 

improvement or need help paying your property 

taxes, you may want to find out if you qualify 

for any low-cost single-purpose loans that may 

be available in your area. Area Agencies on Aging 

(AAAs) generally know about these programs. To 

find the nearest agency, visit www.eldercare.gov 

or call toll-free, 1-800-677-1116. Ask the AAA 

for information about available “loan programs 

for home repairs or improvements,” or “property 

tax deferral” or “property tax postponement” 

programs. 

n If you are interested in a federally-insured 

HECM, know that all HECM lenders must 

follow HUD rules, and that many of the loan 

costs including the interest rate will be the same 

no matter which lender you select. Still, some 

costs including the origination fee, other closing 

costs, and servicing fees may vary among lenders. 

n If you live in a higher-valued home, you may be 

able to borrow more from a proprietary reverse 

mortgage. But it generally will cost more. The 

best way to see key differences between a HECM 

and a proprietary loan is with a detailed sideby-side comparison of future costs and benefits. 

Many HECM counselors and lenders can 

provide you with this important information.

n No matter which type of reverse mortgage you 

are considering, be certain you understand all 

the conditions that could make the loan due and 

payable. Ask a counselor or lender to explain the 

Total Annual Loan Cost (TALC) rates, which 

show the projected annual average cost of a 

reverse mortgage, including all itemized costs.

Be a Savvy Consumer 

Be cautious if anyone tries to sell you something, 

like an annuity, and suggests that a reverse mortgage 

would be an easy way to pay for it. If you don’t 

fully understand what they’re selling, or you’re not 

sure you need what they’re selling, be even more 

skeptical.

FTC Facts For Consumers 
Keep in mind that your total cost would be 

the cost of what they’re selling plus the cost of the 

reverse mortgage. If you think you need what they’re 

selling, shop around before you buy.

No matter why you decide to take a reverse 

mortgage, you generally have at least three business 

days after signing the loan documents to cancel it for 

any reason without penalty. Remember that you 

must cancel in writing. The lender must return any 

money you have paid so far for the financing.

Reporting Possible Fraud

If you suspect that anyone is violating the law, let the 

counselor, lender, or loan servicer know. Then, file a 

complaint with:

n your state Attorney General’s office or state 

banking regulatory agency, and 

n the Federal Trade Commission (FTC). You can 

do that online at ftc.gov or by phone, toll-free, at 

1-877-FTC-HELP (1-877-382-4357). 

Whether a reverse mortgage is right for you 

is a big question. Consider all your options. You 

may qualify for less costly alternatives. Contact the 

following organizations for more information:

Reverse Mortgage Education Project

AARP Foundation

601 E Street, NW

Washington, DC 20049

1-800-209-8085

www.aarp.org/revmort/list

U. S. Department of Housing and Urban 

Development (HUD)

451 7th Street, SW

Washington, DC 20410

1-888-466-3487

www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm

Federal Trade Commission

Consumer Response Center

600 Pennsylvania Avenue, NW

Washington, DC 20580

ftc.gov/credit — Click on “Mortgages & Your 

Home” 1-877-FTC-HELP (1-877-382-4357)

The FTC works for the consumer to prevent 

fraudulent, deceptive, and unfair business practices 

in the marketplace and to provide information to 

help consumers spot, stop, and avoid them. To file 

a complaint or to get free information on consumer 

issues, visit ftc.gov or call toll-free,

1-877-FTC-HELP (1-877-382-4357); TTY: 

1-866-653-4261. The FTC enters Internet, 

telemarketing, identity theft, and other fraud-related 

complaints into Consumer Sentinel, a secure, online 

database available to hundreds of civil and criminal 

law enforcement agencies in the U.S. and abroad.

 FTC Facts For Consumers

For The Consumer Federal Trade Commission

www.ftc.gov 1-877-ftc-help

Federal Trade Commission

Bureau of Consumer Protection

Division of Consumer and Business Education