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Where a reverse mortgage fits in a retirement plan, and where it doesn't

Tom Jarboe, NMLS #210600
Checked November 3, 2026

Written for real estate agents, planners, CPAs and attorneys. Homeowner or family member? Start with the family guide: Is a reverse mortgage a good idea? Honest answers, both sides.

This page is for the planning work: where it fits, the rules for your file, and what to ask before your client signs.

Four places it can fit

1. Retiring a forward mortgage payment. A HECM can pay off an existing mortgage at closing. After that there's no required monthly mortgage payment, but property taxes, homeowners insurance, HOA dues and upkeep stay the client's, and not paying them can make the loan come due.

A large payoff leaves less room under the first-year limit. See refinancing into a reverse mortgage and how much you can get.

2. A standby line of credit. HUD's rule has the principal limit grow each month at one-twelfth of the loan's interest rate plus one-twelfth of the annual mortgage insurance rate, and on an adjustable-rate HECM that growth can be made available to draw (24 CFR 206.3, definition of "principal limit"; first-year limits can apply).

So the unused part of the line grows. That growth is more room to borrow, not money paid to the client, and anything drawn adds to the balance. Draws stop if the loan comes due.

A fixed-rate HECM pays a single lump sum at closing, with no further draws after that (24 CFR 206.19(e) and 206.3). See ways to receive the money.

3. Taxes and insurance through a set-aside. The lender's Financial Assessment can require a set-aside (HUD calls it a LESA) that pays (fully funded) or helps pay (partially funded) property taxes and hazard and flood insurance from the loan. The set-aside reduces what's available to draw, and payments are added to the balance when made. See how a set-aside works.

4. HECM for Purchase when downsizing or rightsizing. A client 62 or older can buy a new principal residence with a HECM, covering the rest of the price and closing costs from their own funds, and must move in within 60 days of closing.

Bring it up before the client lists the current home. See HECM for Purchase for agents and the types of reverse mortgages.

Here's how I'd put it: the home is one asset in the plan, and a HECM is one way to use it. Compare it with selling, a HELOC or no change. See the alternatives.

Where it doesn't fit

• The client may move or need care away from home within a few years. The upfront costs are hard to justify over a short stay, and more than 12 months in a row away because of illness can make the loan due if no other borrower lives there.
• The home's ongoing costs already strain the budget, even with a set-aside.
• Keeping the house in the family matters more than using its equity.
• Someone else lives in the home who isn't a borrower or an eligible non-borrowing spouse. HUD's rules don't stop the loan from coming due for them.
• The plan depends on the client using loan money to buy an annuity or other investment. California's required notice says senior advocacy groups advise against it, and the state's worksheet asks the client about it directly (Civil Code 1923.5). No one involved in making the loan may require an annuity, or refer the client for an annuity or other financial or insurance product, before closing or before the right to cancel ends (Civil Code 1923.2(i)).

Tax treatment, rule by rule

I'm not giving tax advice. Here are the rules and their sources; you and your client apply your own judgment.

• Loan advances aren't income. IRS Publication 936 (2025) says reverse mortgages "are considered loan advances and not income" (Publication 554 says the same).
• Interest is generally not deductible. Publication 936 (2025) says that, generally, interest accrued on a reverse mortgage "is considered interest on home equity debt and isn't deductible." How that applies to a particular client is a question for you or their tax professional.
• Check the current year. Confirm the version of the publication that applies when you advise.

SSI, Medi-Cal, Social Security and Medicare

• Social Security and Medicare. The FTC says a reverse mortgage "won't affect your Social Security or Medicare benefits."
• SSI timing. SSA's staff manual says loan proceeds aren't income because they must be repaid (POMS SI 00815.350), but cash a person still has after the month it was received counts as a resource (POMS SI 01120.220). For an SSI client, draw timing matters.
• Medi-Cal. California law treats reverse mortgage payments as loan proceeds, not income, for state means-tested programs, and undrawn money as home equity, but only where that doesn't conflict with federal law (Civil Code 1923.9). Medi-Cal follows federal rules, so send these clients to the county or an elder-law attorney before any draw. See SSI, Medi-Cal and benefits.

The estate and the heirs

The balance grows: interest, the annual mortgage insurance and any financed costs are added every month, and the next month's interest is charged on the larger balance. Equity shrinks over time, and sometimes nothing is left.

A HECM is non-recourse, which means neither the borrower nor the heirs ever owe more than the home is worth when it's sold. When the loan comes due, the heirs can pay it off and keep the home, sell it, or sign it over.

If the balance is more than the home is worth, a sale for at least 95% of the current appraised value satisfies the loan (HUD's rule). To keep the home, the heirs should get the exact payoff from the servicer in writing, because HUD's own materials describe it differently. See heirs: keep, sell or walk away and inherited homes for attorneys.

The costs, in words

There's an upfront FHA mortgage insurance premium figured on the home's value up to HUD's limit, an annual mortgage insurance premium charged on the balance, a lender origination fee that HUD caps, third-party closing costs such as appraisal and title, and interest.

Most can be paid from the loan, which raises the starting balance. Ask the lender for the Total Annual Loan Cost table: it shows how the yearly cost changes with how long the client keeps the loan. See what it costs.

Questions to ask the lender

• Fixed or adjustable, and why? Which payment options come with each?
• What can the client take at closing and in the first 12 months, and what stays in the line?
• Is a set-aside required after the Financial Assessment? How big, and how does it change what's left?
• Please list every cost in writing, and show the Total Annual Loan Cost table.
• Is this a HECM or a proprietary loan? Proprietary loans set their own rules, including non-recourse and spouse protections, so get them in writing.

How to be part of it

Your client can bring you to every meeting with me, in person or by phone. Before applying, they must meet with an independent HUD-approved counselor, and so must any non-borrowing spouse or co-owner. Ask the counseling agency whether you can join the session. Bring the client's budget for taxes, insurance and upkeep.

Checklist for your file

• Client's age, and the youngest borrower or spouse's age
• How long the client expects to stay, and any care or move plans
• Yearly property taxes, insurance, HOA dues and upkeep, and how they'll be paid
• Payment option chosen, and why it fits the plan
• First-year limit, set-aside amount and line of credit, in writing from the lender
• Every cost in writing, plus the Total Annual Loan Cost table
• Tax position reviewed against IRS Publication 936 for the current year
• SSI or Medi-Cal status checked with the agency or an elder-law attorney
• Heirs' wishes discussed
• Counseling certificate date, and the 7-day California wait noted
• Alternatives compared: selling, a HELOC, or no change

Working with me

Call me at (909) 869-6588 or email [email protected], or have your client call me directly. I'll go over the costs first and tell you plainly if it isn't a fit. Every HECM requires independent counseling before the client applies, and California adds a 7-day wait after counseling before a final application or any fees.

This page is education only. I don't pay or accept referral fees or anything of value for referrals, and your clients are always free to choose any lender.

Tom Jarboe, Regional Sales Manager, New American Funding, NMLS #210600, Diamond Bar.

Have a client weighing a reverse mortgage? Call or email me: (909) 869-6588. More for professionals.

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