How to Use a Reverse Mortgage as a Smart Retirement Planning Tool

10.03.2025 | Category: Retirement Planning

Estimated Read Time: 7 minutes

Summary: A reverse mortgage converts home equity into tax-free cash which can be used to eliminate monthly mortgage payments or provide extra funds to cover expenses in retirement. This article explains how reverse mortgages work, their pros and cons, and how you can continue to enjoy the comfort and security of your own home without the obligation of monthly payments, as long as loan conditions are satisfied.

Saving enough for retirement can be a challenge. The most recent Federal Reserve Survey of Consumer Finances¹ found that Americans from age 55 to 64 had a median retirement savings of just $185,000 in 2022. While that’s an improvement from 2019, it still falls short of what many financial professionals recommend retirees need to maintain their lifestyles.

Rising inflation, increasing healthcare costs and market fluctuations have made it more difficult for those near retirement to be fully prepared. The 2025 EBRI/Greenwald Research Retirement Confidence Survey² found that 33% of American workers don’t feel confident in their future financial security. This means that retirees may need to consider all their assets in their financial planning.

Luckily, most retirees do have another valuable asset: their homes. Americans 62 and over enjoy almost $14 trillion in home equity. Most retirees have worked hard to build up that home equity and a reverse mortgage is a savvy way to tap into those gains in home equity without having to sell.

What is a reverse mortgage and how does it work?

A reverse mortgage allows homeowners to convert part of the equity in their home into cash, without having to give up ownership or make monthly mortgage payments. Instead of paying the lender, the lender pays the homeowner. This can be done through a lump sum, monthly installments, a line of credit or a combination of these.

The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM). ³ The HECM is guaranteed by the Federal Housing Authority (FHA). This means that you don’t lose ownership of your home and it can be passed down to your heirs. Another FHA guarantee makes sure that you are not responsible for a loan balance beyond the value of the home.

An HECM reverse mortgage is available to homeowners who are 62 years of age or older and have built up significant home equity. How much you can receive is based on three factors, your age, the value of the home and the prevailing interest rate. What you are eligible to borrow at the outset is a portion of the FHA lending limit, which for 2025 is $1,209,750⁴.

Should you not choose to draw the entire benefit in the beginning, the rest will be available to you as a line of credit. This line of credit grows in borrowing power as you age, a valuable feature for helping you meet future needs.

If you have a current mortgage, the reverse mortgage will replace it. You will no longer have to make monthly principal and interest payments. This provides considerable relief to most homeowners. The home will continue to be yours, not the lender’s. Like all mortgages, you are responsible for taxes and insurance and keeping the home maintained.

No payment is required until the last borrower or eligible non-borrowing spouse passes away or if the home is vacated for more than 12 months. This may happen if the last homeowner moves into a long-term healthcare facility. If the remaining spouse is still in the home, no payment is due.

Step-by-step guide: Applying for a reverse mortgage

Evaluate your needs: Determine how much retirement income you need, what you have saved, and whether tapping into home equity would help.
Research: Read about reverse mortgages from HUD or the National Reverse Mortgage Lenders Association (NRMLA).
Counseling: Arrange a session with a HUD-approved counselor⁵ to ensure you fully understand the loan and your responsibilities.
Choose a lender: Compare lenders’ reverse mortgage rates, fees and loan options to find one that best meets your needs.
Appraisal and underwriting: The lender orders an appraisal of your home to establish its value. The lender will also review whether a reverse mortgage is suitable for your situation and whether you can sustain your tax and insurance obligations.
Closing: Sign loan documents and receive funds according to the payout option you chose.
Maintain obligations: Continue paying property taxes, homeowner’s insurance, and maintaining your home to avoid default.

Who should consider a reverse mortgage?

A reverse mortgage may be a good option for qualifying homeowners who want to retire with greater peace of mind. It is generally not recommended for homeowners who don’t expect to stay in the home for at least five years. Long considered an option of last resort, people now use their reverse mortgages as a part of retirement planning.

The most popular use of a reverse mortgage is to replace a current mortgage. This relieves the need for monthly mortgage payments. Other uses:

Major home improvements: A lump sum draw allows you to improve your home environment and prepare it for aging-in-place.

Supplement monthly income: Homeowners who are consistently coming up short can arrange automatic monthly payments from the reverse mortgage.

Save for rainy days ahead: If you are concerned that your emergency fund isn’t enough to cover unexpected expenses, a line of credit would be a good option. Because your reverse mortgage line of credit is insured by FHA, the lender cannot cancel, reduce or freeze your available funds.

Delay investment withdrawals: If you do not want to spend your savings when the value is low due to a market downturn, you can substitute draws from your reverse mortgage. This protects your savings from selling low and allows you to regain value when the market recovers.

There are no rules on how you spend reverse mortgage funds, giving you flexibility to match your unique financial plan.

Comparing reverse mortgages with other options

Before committing, it’s smart to consider what would work best for you. Some questions to ask yourself are:

Do you want to move and downsize?
Do you want to use a home equity loan that involves monthly payments?
Do you prefer drawing more from your savings which could trigger more income taxes?
Would you consider working part-time to increase your income?

A reverse mortgage can make sense if you prefer to age in place and want flexible, payment-free cash flow, but it is not for everyone.

Are reverse mortgages safe?

Since HECM reverse mortgages are backed by the FHA, they come with multiple consumer protection measures:

Reverse mortgage counseling

Before you can officially apply for a reverse mortgage, homeowners are required to complete a counseling session with a third-party counselor approved by the U.S. Department of Housing and Urban Development (HUD). This ensures that you are fully educated on the reverse mortgage process. You will be advised that even though no payments are required, a reverse mortgage is a loan and interest is involved.

The right to cancel

Homeowners who have closed on their reverse mortgage have the right to cancel their transaction within three business days after signing the final loan documents.

A non-recourse loan

A HECM loan is a “non-recourse” loan, which means borrowers will never owe more than the home’s value at repayment time. This protects both you and your heirs.

Eligible non-borrowing spouse

In September 2021, federal rules strengthened protections for eligible non-borrowing spouses, who are often younger than 62, allowing them to remain in the home if the borrowing spouse dies or moves into long-term care.

Risks and long-term considerations

Reverse mortgages provide flexibility for the homeowner. For example, homeowners may make voluntary interest payments to keep the loan balance low. Or they can pay off the reverse mortgage at any time with no pre-payment penalty. Other considerations:

Closing costs and fees are higher than traditional loans, reducing available equity.
Interest accrues on the loan balance, which grows over time.
Reduced home equity can mean less inheritance left for heirs, although there can be greater remaining value in the homeowner’s portfolio.
Failure to pay taxes and insurance or maintain the home can lead to default.
It’s essential to plan carefully to make sure you can meet your tax and insurance obligations over the long term.

Make informed decisions about your retirement

Building savings is an important part of retirement planning but so is understanding all the tools you have at your disposal. A reverse mortgage can offer greater stability and peace of mind but it’s not a solution for every homeowner.

At Mutual of Omaha, we help you make confident decisions about your retirement future. Speak with a Mutual of Omaha reverse mortgage professional today to explore how a reverse mortgage might fit into your broader retirement strategy, and whether it aligns with your long-term goals.

Think a reverse mortgage might be the right choice?

Find out more in our free guide

Download the Guide

Frequently asked questions

How does a reverse mortgage affect Social Security?

A reverse mortgage doesn’t affect your Social Security or Medicare benefits because the money you receive is considered a loan, not income. However, it could impact needs-based programs like Medicaid or Supplemental Security Income (SSI) if funds are kept as cash assets.

How do interest rates impact how much you can borrow?

The higher the reverse mortgage rate, the less money you can borrow because more interest will build up over time. Lower reverse mortgage rates mean you can unlock more cash from your home’s equity.

What happens to a reverse mortgage if you go into a nursing home?

If you are the last homeowner to move into a nursing home or other long-term care facility for more than 12 consecutive months, your reverse mortgage typically becomes due and payable. This means you will arrange to repay the loan—usually by selling the home—or the home can be deeded to the lender. A remaining borrowing spouse, or eligible non-borrowing spouse, is protected from having to leave the home and payment is not required until the house is vacated permanently by them.

Footnotes:

Federal Reserve, Board of Governors of the Federal Reserve System, November 2023
Employee Benefit Research Institute (EDRI), 2025 RCS FACT SHEET #1 RETIREMENT CONFIDENCE, April 2025
Investopedia, Home Equity Conversion Mortgage (HECM): Definition, Eligibility, June 2025
U.S. Department of Housing and Urban Development, Single Family HECM Maximum Claim Amount, 2025
HUD Exchange, HECM Origination Counseling

Disclosures

Mutual of Omaha Mortgage, NMLS ID 1025894. 3131 Camino Del Rio N Suite 1100, San Diego, CA 92108.

Charges such as an origination fee, mortgage insurance premiums, closing costs and/or servicing fees may be assessed and will be added to the loan balance. As long as you comply with the terms of the loan, you retain title until you sell or transfer the property, and, therefore, you are responsible for paying property homeowner’s taxes, insurance, along with the cost of the home maintenance and HOA fees. Failing to pay these amounts may cause the loan to become immediately due and/or subject the property to a tax lien, other encumbrance or foreclosure. The loan balance grows over time, and interest is added to that balance. Interest on a reverse mortgage is not deductible from your income tax until you repay all or part of the interest on the loan. Although the loan is non-recourse, at the maturity of the loan, the lender will have a claim against your property and you or your heirs may need to sell the property in order to repay the loan, or use other assets to repay the loan in order to retain the property.

These materials are not from HUD or FHA and the document was not approved by HUD, FHA or any Government Agency.

Subject to Credit Approval. www.nmlsconsumeraccess.org

Consult your Tax Advisor. A Reverse Mortgage is a debt. Borrower must occupy home as primary residence.