Reverse Mortgages: 7 Things Lenders Don't Want You to Misunderstand

1. You still own your home

The biggest myth: the lender takes title. They don't. You retain ownership, and your name stays on the deed. The lender holds a lien — same as a normal mortgage — and gets paid back when the loan becomes due.

2. The loan becomes due eventually

A reverse mortgage doesn't have monthly payments, but it isn't free. The loan must be repaid when:

You sell the home
You move out for 12+ months (e.g., to long-term care)
You pass away (heirs typically have 6 months to repay or refinance)
You fail to pay property tax, insurance, or HOA

Failing to keep up #4 is the most common reason seniors lose homes with reverse mortgages.

3. You can never owe more than the home is worth

HECMs are non-recourse. If the loan balance exceeds the home value at payoff time, the lender (via FHA insurance) eats the difference. Your heirs are never on the hook for the gap.

This is why upfront mortgage insurance premium (MIP) is 2% of the home value — it funds the insurance pool.

4. The upfront fees are substantial

Typical HECM closing costs include:

Origination fee — 2% of first $200K + 1% above (max $6,000)
Upfront MIP — 2% of home value (mandatory)
Standard closing costs — title insurance, appraisal, recording (~$2-4K)
Servicing fees built into the rate

On a $500K home, expect $15-20K of fees coming out of your proceeds. Our Reverse Mortgage calculator shows this clearly.

5. You don't get the home's full value

The Principal Limit Factor (PLF) — what % of the home value you can borrow — depends on:

Borrower's age (older = higher PLF)
Expected interest rate (lower = higher PLF)
HECM lending limit (2025: $1,209,750)

A 65-year-old with a 6% expected rate typically gets ~50% of home value. A 75-year-old gets ~58%. An 85-year-old gets ~67%.

6. There are 3+ payment options

You can receive proceeds as:

Lump sum — all at once (fixed-rate only)
Tenure payment — monthly for as long as you stay in the home
Term payment — monthly for a set period
Line of credit — draw as needed, unused portion grows

The line of credit is the most flexible and the credit line actually grows over time at the loan's interest rate. This is a unique feature most homeowners don't know about.

7. Counseling is mandatory

HUD requires every prospective borrower to complete counseling with a HUD-approved counselor before closing. The counselor (free or low-cost) walks through:

All alternatives (HELOC, downsizing, family loan, life settlement)
Long-term implications
Whether the loan is genuinely the right choice

Take this counseling seriously. The counselor's job is NOT to talk you into the loan — they often steer people away from it.

Honest alternatives to consider first

Before a HECM, evaluate:

HELOC — cheaper closing costs, but requires income to qualify and has minimum payments
Downsize — sell the home, buy a smaller one, bank the difference (often the right answer)
Sale-leaseback — sell to an investor who rents it back to you
Family loan — kids fronting cash in exchange for inheritance offset (formalize with a real promissory note)

When a reverse mortgage genuinely makes sense

A HECM is the right tool when:

You have substantial home equity and limited other assets
You plan to stay in the home for 5+ years (so closing costs amortize)
You can comfortably keep paying tax, insurance, and HOA
You don't need to leave the home to heirs
You've done the HUD counseling and the counselor concurred

In that situation, it's a perfectly legitimate financial tool. Outside that situation, downsizing or a HELOC usually wins.

How much you can actually borrow

The amount available is the principal limit, and it is a fraction of your home's value determined by three things:

Age of the youngest borrower — older borrowers qualify for a larger fraction, because the expected loan term is shorter.
The expected interest rate — higher rates reduce the fraction sharply.
Home value, capped at the FHA lending limit for HECM loans.

The critical expectation to set: this fraction is considerably smaller than most people assume, and it falls as rates rise. Borrowers frequently arrive expecting to access most of their equity and find the figure is a minority of it — with closing costs and the upfront mortgage insurance premium deducted from that.

Because the calculation depends on a published factor table that changes with rates, treat any estimate — including ours — as indicative, and get a figure from a HUD-approved counsellor before making plans that depend on it.

Non-recourse is the feature that matters most

A HECM is non-recourse. Neither you nor your heirs can owe more than the home is worth at the time it is sold, even if the loan balance has grown past the value. The mortgage insurance premium you pay funds exactly this guarantee.

When the loan comes due, heirs choose between:

Selling the home and keeping any proceeds above the balance.
Paying off the loan — at the lesser of the balance or 95% of appraised value — and keeping the house.
Handing over the deed and walking away owing nothing.

That last option is why the common fear of heirs inheriting a debt is misplaced. What heirs can lose is the equity, not their own money.

The three ways borrowers actually lose the house

Foreclosure on a reverse mortgage is nearly always triggered by the borrower's obligations, not by the loan balance:

Property charges. You remain responsible for property taxes and homeowners insurance. Falling behind on either is a default. This is the most common cause by a wide margin.
Occupancy. The home must remain your principal residence. Moving into care for more than twelve consecutive months makes the loan due, which is a serious consideration for anyone whose health is declining.
Maintenance. The property must be kept in reasonable repair.

A lender may require a set-aside from the proceeds to cover taxes and insurance where income is tight. That reduces the cash available but prevents the most common route to losing the home.

The non-borrowing spouse problem

If one spouse is not on the loan — often because they were under the minimum age at origination — their protection depends on the rules in force when the loan was taken out. Under current rules an eligible non-borrowing spouse may generally remain in the home after the borrower dies, but no further funds are available to them and the obligations continue.

Older loans carry weaker protections. If a reverse mortgage is already in place and a spouse is not named on it, that is worth checking with a counsellor rather than assuming.

When it genuinely makes sense

You intend to remain in the home for the rest of your life.
You have income to cover taxes, insurance and upkeep.
The alternative is selling a home you do not want to leave.
You need income more than you need to leave the house to heirs.

When something else is usually better

You may move within a few years. Closing costs and the upfront premium are front-loaded and never recovered over a short term.
You want a lump sum for a specific purchase. A HELOC is cheaper if you can service the payments.
Leaving the home to heirs is a priority. The balance compounds; equity erodes.
You could downsize. Selling frees the entire equity, not a fraction, and usually lowers running costs at the same time.

HUD-approved counselling is mandatory before a HECM, and it is genuinely useful. Go into it with the questions above rather than treating it as a formality.