What is a reverse mortgage? How it works and what it costs

A reverse mortgage flips the usual arrangement: instead of you paying the lender each month, the lender pays you — as a lump sum, monthly checks, a line of credit, or a mix — with your home equity as the source. No monthly repayment is required. Interest and fees accrue onto the loan balance, which grows over time, and the whole thing comes due when you die, sell, or move out for good, almost always settled by selling the house. It is a legitimate financial tool with a genuinely troubled sales history, which is why it deserves an unusually clear-eyed look.

The basic mechanics

• Who qualifies: the most common product — the FHA-insured Home Equity Conversion Mortgage (HECM) — requires all borrowers to be 62 or older, live in the home as a primary residence, own it outright or have substantial equity, and complete a HUD-approved counseling session before applying.
• How much you can get: a percentage of home value (up to the FHA lending limit, roughly $1.2 million) determined by age and interest rates — typically 40–60% of value, with older borrowers and lower rates unlocking more.
• What you still pay: property taxes, homeowners insurance, HOA dues, and maintenance. Falling behind on these can trigger default and foreclosure even though there's no monthly mortgage payment.
• How it ends: when the last borrower dies or leaves the home for 12+ months, heirs typically get several months (extendable) to sell, refinance the balance, or hand the lender the keys.

What it really costs

Reverse mortgages are expensive relative to almost every other way of tapping equity. A HECM carries an upfront FHA mortgage insurance premium of 2% of the home's value, an annual 0.5% insurance charge on the balance, origination fees (capped at $6,000), closing costs, and monthly servicing fees — often $10,000–$20,000 in total costs on a typical home before the first dollar reaches you. And because nothing is repaid monthly, interest compounds against the house: a $150,000 balance at around 7% roughly doubles in about a decade. That's not a hidden trick — it's the explicit design — but it means the equity left for later (long-term care, a move, an inheritance) shrinks faster than intuition suggests.

The payout choice matters more than people think

Taking the maximum lump sum on day one is the most expensive path — interest starts compounding on the full amount immediately, and lump sums are historically where misuse happens (spent fast, invested badly, or handed to a salesman with an annuity to pitch). The line-of-credit option has a genuinely interesting feature: the unused portion grows over time at the loan's rate, so credit opened at 65 and left untouched can be substantially larger at 80. Retirement researchers have studied this 'standby line of credit' as a buffer that lets retirees avoid selling investments in down markets. Monthly 'tenure' payments, guaranteed as long as you live in the home, function like a paycheck. Which structure fits — if any — is exactly what the mandatory counseling session and a fee-only advisor are for.

Questions to answer before applying

1. Is staying in this specific house for 10+ years realistic — physically, financially, and practically? The fixed costs amortize terribly over short stays.
2. Can the household reliably cover taxes, insurance, and upkeep from other income? If not, the loan postpones a crisis rather than solving one.
3. Is a younger spouse or resident family member protected in writing if the borrower dies or moves to care?
4. Have the cheaper alternatives — downsizing, a HELOC while income still qualifies, family arrangements — been priced honestly side by side?
5. What does the plan assume about long-term care? Home equity is many families' care fund of last resort; spending it early removes that backstop.
6. Do the heirs know? Surprise is the enemy — a family conversation now prevents the estate-settlement scramble later.

The bottom line

A reverse mortgage converts home equity into spendable money without a move and without a monthly payment, at the cost of high fees and a debt that compounds against the house. For a house-rich, income-poor homeowner committed to aging in place — especially one using the line-of-credit version as a standby buffer — it can genuinely improve retirement. Used young, taken as a lump sum, or sold as part of a package deal, it reliably destroys wealth. The tool is neutral; the fit is everything. The mandatory HUD counseling is a floor, not a ceiling — for a decision this irreversible, an independent fee-only advisor and an informed family are worth far more than the session that regulation requires.