A client I met in Austin came to me feeling heavy-hearted due to unexpected surgical expenses. Although they had adequately prepared retirement funds, the sudden medical costs were becoming a burden on their monthly expenses. They had already paid off their home and asked if there was any way to utilize that equity. Today, we will follow this person's situation from start to finish to see how a reverse mortgage can actually help and what key points should not be overlooked.

To start with the basic structure, a reverse mortgage is a product that allows homeowners aged 62 and older to borrow against the equity of their home. Unlike a traditional mortgage, where you make monthly payments, you receive funds from the lender in a lump sum, monthly payments, or a line of credit. The principal and interest are repaid when the home is sold, the owner passes away, or the home is no longer used as the primary residence. The most common product is the HECM, which is the only type of reverse mortgage insured by the federal government.

If, like this client, the goal is to cover medical expenses, the line of credit option is often considered. This is because you can withdraw funds as needed, and the unused portion of the line of credit increases over time. However, this option is not always the most advantageous. If a large sum is needed upfront, a lump sum may be more appropriate, and if a fixed amount is needed monthly, monthly payments might be better. The best option depends on the individual's medical expense scale and future plans.

Looking at the market in Austin, the median home price is about $540,000 (as of July 2026). This serves as a basis for estimating the available equity, but keep in mind that the actual loan limit varies based on age, interest rates, and appraisals. The property tax rate in Travis County, where Austin is located, is around 1.34%, and additional fees from the city and school district are added on top of that. The average effective tax rate in Texas is 1.31%, which is higher than the national average. Even with a reverse mortgage, this property tax must still be paid, so I advised this client to first check if they would be able to manage future property taxes.

In terms of costs, there are origination fees, an initial mortgage insurance premium of about 2%, an annual fee of around 0.5%, and closing costs, which means the initial burden is greater than with a traditional mortgage. The advantages include the ability to create cash flow for medical or living expenses without monthly repayment obligations, and since it is a non-recourse loan structure, heirs are not required to pay any excess if the home value falls below the loan balance. However, keep in mind that over time, the equity in the home may decrease, potentially leaving less for heirs, and if property taxes or insurance premiums are not continuously paid, it could lead to default.

Another point I mentioned is that interest accumulates on the loan balance each month. Since there are no repayments, the balance grows over time, reducing the remaining equity. If the client only uses the line of credit when needed, this can help minimize the interest accrued. After the owner's death, heirs can choose to sell the home to settle the balance, buy it directly at the lower of 95% of the appraised value or the balance, or transfer the home. Decisions must be made within a specified timeframe, so it's advisable to discuss this with family in advance.

In Texas, the population aged 65 and older makes up 13.9% of the total (as of 2024), which is lower than the national average, but the overall population is growing rapidly, increasing the absolute number of retirees. Amid this trend, inquiries about reverse mortgages are rising, but it's important to remember that scams targeting the elderly do exist. HECM applications must go through mandatory counseling with a HUD-approved counseling agency, and I advised this client to seek counseling first and discuss thoroughly with their children before making a decision. This article does not constitute investment or legal advice, and I recommend consulting with a professional before entering into any contracts.