Can Retirees Use a Reverse Mortgage to Buy A Home?

Reverse mortgages have long been a fixture of retirement planning (and sometimes are the punchline of financial jokes.)

But as home prices rise and many retirees look to stretch fixed incomes, the idea of using a reverse mortgage to buy a new home, rather than just tap existing equity, is gaining traction.

However, this type of loan isn’t without risks, which include the potential for scams targeting older homeowners. 

Understanding how reverse mortgages work, and when they make sense, can help retirees make a more informed decision before signing on.

How reverse mortgages work

A reverse mortgage is a loan that you take out against the value of your home. Unlike a regular home equity loan, this type of mortgage loan is only available to people aged 62 or older. Your house is used for collateral, and how much you can borrow depends on how much equity you’ve built up.

Because interest rates and home values directly affect borrowing power, today’s market conditions can play a big role in how appealing a reverse mortgage is. In recent years, rising home prices have boosted the amount of accessible equity for many retirees. 

But, higher interest rates can offset those gains by reducing how much borrowers qualify for, making it especially important to compare loan types and timing before deciding.

The repayment terms of reverse mortgages are also unique: there are no required monthly payments, but the balance goes up over time because interest is compounded. The loan balance is repaid when the borrower sells the home, moves out permanently, or dies.

There are two main types of reverse mortgages:

Home Equity Conversion Mortgages (HECMs) are federally insured by the FHA and make up the majority of reverse mortgages. They come with strict borrowing limits, consumer protections, and counseling requirements designed to prevent borrowers from taking on more debt than their home is worth.

Proprietary reverse mortgages, sometimes called “jumbo” reverse mortgages, are offered by private lenders and are not FHA insured. They can allow higher loan amounts, which may appeal to owners of high-value homes, but typically come with less standardized terms and fewer safeguards.

Why using a reverse mortgage to buy a home might make sense

Reverse mortgages can be appealing for retirees who are “house rich but cash poor.” For many older homeowners, much of their wealth is tied up in their property, making it difficult to access cash without selling or taking on monthly loan payments. 

A reverse mortgage can unlock some of that equity, freeing up liquidity for other needs.

This approach can make sense in several scenarios such as retirees looking to downsize to a smaller, more manageable property; those relocating to be closer to family; or anyone hoping to stretch limited retirement savings further without adding new financial strain.

Let’s say a retiree wants to buy a $425,000 home. They might use about $225,000 from savings for the down payment and finance the remaining $200,000 with a reverse mortgage on the home they currently own outright. 

Because no monthly mortgage payments are required, the retiree frees up more of their income for living expenses, travel, or medical costs, rather than tying it all up in home equity. 

In a high-interest, high-cost housing market, this flexibility can make a meaningful difference. It allows retirees to maintain homeownership and financial independence without depleting savings or taking on traditional mortgage debt.

Pitfalls and risks for retirees taking on a reverse mortgage

As with any major financial move, using a reverse mortgage to buy a home comes with serious trade-offs. It’s important to consider them. 

The biggest drawback is the impact on inheritance. Because interest is compounded—you are paying interest on the interest and the balance—over time, your home equity will decrease as the loan balance grows. That means your heirs may receive less than you had initially planned. They may even have to sell the property to repay the loan when you die.

There are also upfront costs to consider. Reverse mortgages often carry higher closing costs and insurance premiums than traditional mortgages. While you still own the home outright, you’ll also be still responsible for property taxes, homeowner’s insurance, and regular upkeep. Failure to stay current on these can put the loan in default.

Market risk is another consideration. If home values decline, the loan balance could approach the property’s value. You (or your estate) will never owe more than the home is worth, but market fluctuations can still limit flexibility if you need to sell or move earlier than planned.

Bear in mind that not every lender offers reverse mortgages and underwriting and appraisal rules may vary, limiting the type of properties that are eligible. 

If you’re retired, or near retirement, and looking into a reverse mortgage, talk to a HUD-approved counselor or financial adviser who can help determine whether this approach fits your long-term goals.