Vawn Himmelsbach

Tue, Jul 1, 2025, 6:17 AM6 min read

Imagine this scenario: Samantha is retired at 69, but a few years back she took out a reverse mortgage. Now, she’d like to be done with it, especially since the loan comes with a hefty interest rate of 6.75%.

She currently has about $375,000 in home equity while her reverse mortgage loan is close to $250,000. She also has about $300,000 in savings, but she’s wondering if she should use a chunk of those savings to pay off her reverse mortgage and live on her Social Security (about $2,500 a month) instead.

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Or, does it make more sense to stick with the status quo?

A reverse mortgage allows homeowners who are at least 62 to borrow money based on the equity in their home. (Your equity is based on how much you’d get if you sold your home, minus how much you have left on your mortgage.)

Unlike a traditional mortgage, you don’t make monthly loan payments. Instead, the lender pays you, using your house as collateral.

“Reverse mortgage payments are considered loan proceeds and not income. The lender pays you, the borrower, loan proceeds (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home,” according to the IRS.

Because it isn’t considered income, the money is tax-free and won’t generally impact your Social Security or Medicare benefits. But, you still have to pay property taxes and insurance.

Interest accrues on the loan balance, meaning the amount you owe goes up over time. If you have a high interest rate, that can add up — and fast.

It increases your debt while decreasing your equity, and the interest added to your balance each month can “use up much — or even all — of your equity,” explains the Federal Trade Commission about the risks of a reverse mortgage.

The total (including interest) must be repaid either when you move out and sell your home or after you pass away, in which case it must be repaid by your estate.

If you sell your home, you can use part of the proceeds of the sale to pay off the loan. This could make sense if you want to downsize or move in with family, or if you need to move into an assisted living facility.