What Most People Get Wrong About Reverse Mortgages
The TV commercials created a perception that does not match how this tool actually works in a retirement income plan.
If you have seen the reverse mortgage commercials, you already have an opinion. Most people do. And the opinion is usually one of two things: it is a scam, or it is something people do when they have no other options left.
Neither is quite right. The typical American has more than 70% of their net worth tied up in their primary residence. Dismissing home equity as a retirement planning tool without examining what it can actually do is worth reconsidering, especially if you are someone who has spent decades building equity and has not thought carefully about how it fits into your overall retirement income picture.
What a HECM Actually Is
A Home Equity Conversion Mortgage, or HECM, is a reverse mortgage product backed by the Federal Housing Administration. It allows homeowners who are 62 or older to borrow against the equity in their primary residence without making monthly payments. Interest accrues on the outstanding balance, and the loan gets repaid when the last borrower sells the home, moves out permanently, or passes away.
The loan is nonrecourse, which means the lender can only collect against the value of the home. Not from you personally. Not from your estate beyond the home. If the home sells for less than what is owed, the FHA insurance covers the gap.
Four things about HECMs that tend to surprise people
You never give up title to your home. The home remains yours.
You can never owe more than the home is worth at the time of sale.
You cannot be forced out of the home as long as you pay property taxes, maintain insurance, and keep up the property.
You never make a monthly payment while you are living there as your primary residence.
The Costs Are Real and Worth Knowing Upfront
Before getting to the planning applications, the costs deserve an honest look. HECMs carry upfront mortgage insurance premiums, origination fees, and closing costs. Interest accrues on whatever you draw, and that balance grows over time, gradually reducing the equity in the home.
For people who plan to leave the home as a primary inheritance, that erosion matters significantly. For people who plan to age in place and are not focused on passing the home to heirs, the math looks different.
How much you can borrow depends on your age, your home's appraised value, and current interest rates. The HECM lending limit in 2025 is $1,209,750. As a rough illustration for a $400,000 home at late 2024 rates: a 65 year old might access around $128,400. At 70 that grows to around $143,200. At 75, closer to $154,800. Older borrowers can access proportionally more because the loan period is actuarially shorter.
The Planning Uses That Have Nothing to Do With Desperation
The line of credit that grows over time
One of the least understood features of a HECM is that an unused line of credit actually grows over time at the current loan interest rate. The longer you wait to draw on it, the more available credit you accumulate. Opening a HECM line of credit early in retirement, even without an immediate need for it, can make sense purely as a hedge against future needs. The available credit in ten years could be significantly larger than it is today.
A buffer when the market drops
One of the biggest threats to a retirement income plan is taking large withdrawals from an investment portfolio during a significant market decline early in retirement. Drawing from a HECM line of credit during those periods instead of selling investments at a loss gives a portfolio time to recover. The home equity absorbs the short term impact rather than permanently locking in a loss in your retirement accounts.
A bridge to a higher Social Security benefit
Every year you delay Social Security from 62 to 70 increases your lifetime monthly benefit permanently. For someone who needs income in their early retirement years but wants to maximize their Social Security benefit, HECM proceeds can serve as a bridge. Draw on home equity now, leave Social Security alone, and lock in a higher monthly benefit for life. The math on this combination can be compelling depending on your situation.
Who This Actually Works For
A HECM is not the right tool for everyone. It tends to work best for people who plan to stay in their home for the long haul, are not primarily focused on passing the home to heirs, and have meaningful equity built up. It adds the most planning value for people who are asset rich but cash flow constrained, or who want a strategic reserve without taking on additional investment risk.
A HUD approved counseling session is required before applying, and it is worth taking seriously rather than treating it as a formality. It is designed to make sure you understand exactly what you are agreeing to, including the ongoing property tax and insurance obligations that keep the loan in good standing. Those obligations are real, and people who are not able to reliably maintain them should think carefully before proceeding.
Using Home Equity to Bridge to a Higher Social Security Benefit
Every year you delay Social Security past your full retirement age, up to age 70, your monthly benefit grows by roughly 8%. For many people that means the optimal strategy is to delay claiming as long as possible. The challenge is covering living expenses during the gap between retirement and the age when Social Security kicks in.
Home equity can fill that gap. The approach depends on how long the bridge period is.
Shorter bridge periods
If you are bridging from full retirement age to 70, a HELOC can make sense. It sets up quickly, costs less to establish, and the repayment can be absorbed once Social Security income begins. The key is making sure your retirement income plan can handle the repayment schedule once the bridge period ends.
Longer bridge periods
If you are retiring at 62 and want to delay Social Security to 70, an eight year bridge is a different undertaking. A HECM term loan tends to be a better fit for longer periods because it does not require repayment during the bridge. The higher upfront costs of establishing a HECM are effectively spread across more years of use, which makes the economics more reasonable.
A HECM Line of Credit as a Financial Safety Net
Every retiree faces the possibility of lower probability but genuinely expensive events: a major health episode, a long term care need, a prolonged market decline that depletes the portfolio faster than projected. Traditional insurance covers some of these. For situations where insurance is unavailable, too expensive, or simply insufficient, a HECM line of credit established at retirement can serve as a financial backstop.
Practical uses for a HECM credit line as a backstop
Covering long term care insurance premiums that have risen to otherwise unaffordable levels over time
Paying large healthcare expenses during the elimination period of an existing long term care policy
Covering living expenses if portfolio assets were unexpectedly depleted by an extended market downturn
The upfront cost to establish the HECM line of credit can be thought of as an insurance premium paid once to create ongoing protection. And because an untapped HECM line of credit grows over time, the longer it goes unused, the larger the available reserve becomes. It is a backstop that gets stronger the less you need it.
Alfred Edmonds is an Investment Advisor Representative at Cetera Investors in San Jose, CA. He specializes in retirement income planning for California educators, pre-retirees, and high net worth individuals. This content is for informational and educational purposes only and does not constitute financial, tax, or legal advice. HECM loan limits, interest rates, and borrowing amounts are subject to change. Please consult a qualified financial professional and HUD approved HECM counselor regarding your specific situation. A diversified portfolio does not assure a profit or protect against loss in a declining market.