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How Reverse Mortgages Work

Benefits and Risks of the Reverse Mortgage
In December of 2007, a Senate Special Committee on Aging discussed the rapid growth of the reverse mortgage and its effect on older Americans.
In December of 2007, a Senate Special Committee on Aging discussed the rapid growth of the reverse mortgage and its effect on older Americans.
Win McNamee/Getty Images

As of 2006, approximately 8,000 Americans turned 60 each day [source: U.S. Census Bureau]. Some of these retirees left the workforce early due to downsizing and now find themselves with smaller pensions and minimal Social Security benefits. Many face exploding health care costs and rising living expenses. Others reach retirement age with outstanding debts they now find difficult to pay on fixed incomes. The appeal of a reverse mortgage's ready cash is obvious.

So what are the benefits and risks involved?


  • You're allowed to tap into your home's equity without having to repay the loan, as long as your home is your principal residence.
  • In most cases, the loan doesn't have to be paid back until the last surviving borrower dies, sells the home or permanently moves out.
  • The payout advances are not taxable and bring no risk of losing Social Security or Medicare benefits.
  • With most programs, there are no restrictions on how you use the money.


  • Upfront costs are generally much higher than with conventional mortgages and are often paid out of the home's equity, reducing the amount of cash available.
  • You're still responsible for real estate taxes, homeowners' insurance and home maintenance. Unless you maintain the home properly, the lender may take back the property.
  • You're responsible for costly mortgage insurance, which protects the lender in case the value of the property decreases or you hold the mortgage over a very long period of time.
  • Since a reverse mortgage is a rising debt loan, the interest continues to accrue, and this increase compounds over time. As the debt increases, the equity decreases. This will reduce assets for your heirs, as the loan balance must be paid off when you permanently move out or you die. However, you or your estate can never owe more than the home's appraised value when it's sold.
  • In some cases, you can lose your house if you vacate it for a prolonged stay in a nursing home, rehabilitation center or hospital. Even though you intend to return home, the lender can require repayment of the full loan balance plus interest.

Before making a decision that can affect your financial security and your future, get all the facts. First, explore other options available to meet your needs. For example, if you need a new furnace and you don't have the cash, there may be state or local assistance programs that can help. If you can't pay your property taxes, you may qualify for a deferred payment program.

If you do decide to take out a reverse mortgage, compare several different plans and discuss your needs with your family and a reverse mortgage counselor. AARP offers counseling through the HUD network of HECM counselors. You can reach a counselor by calling 1-800-209-8085 weekdays and asking for reverse mortgage counseling [source: AARP].

For more information about reverse mortgages and other related topics, see the links on the following page.