Is a Reverse Mortgage Good or Bad? All the Pros and Cons

Sometimes, retirement expenses can be more than you planned for. It might be the increased cost of daily living, high medical bills, or the realization that you need to modify your home to stay there longer.

You don’t always know what exact expenses you’ll have and need flexibility to cover these costs. That’s where a reverse mortgage can be an option to reduce financial pressure and give you peace of mind. In fact, 95% of all reverse mortgage borrowers choose a home equity line of credit structure so they can draw funds if they need them.

There are many questions about reverse mortgages, and you may wonder if it’s even a good idea for your situation. This article covers the pros and cons to help you consider all sides of this loan option.

Types of Reverse Mortgages

Reverse mortgage loans are a way to draw against your home equity, get cash now, and defer payments until you move, sell, or pass away. Depending on your situation, you may qualify for one of three types:

• Home Equity Conversion Mortgages (HECM): These loans fall under the Federal Housing Administration (FHA) and represent most reverse mortgages.
• Proprietary Reverse Mortgages: Offered by private lenders, these can cover larger loan amounts beyond FHA limits.
• Single-Purpose Reverse Mortgages: Available through local or state agencies, these have restrictions on how you can use the funds.

Pros of Reverse Mortgages

Supplemental Income

HECMs provide a tax-free way to supplement your retirement income. People often use loan funds to:

• Cover Social Security benefit shortfalls
• Defer withdrawing from retirement accounts
• Pay daily expenses

Age in Place

Reverse mortgages help homeowners remain in their homes longer by paying for home modifications or in-home care. These can include ramps, wider doorways, or other accessibility upgrades.

They also protect non-borrowing spouses, allowing them to remain in the home under certain conditions.

Payment Deferral

You don't make monthly mortgage payments. Loan repayment happens only when the home is sold, the borrower moves, or passes away. Proceeds can be received as a lump sum, monthly income, line of credit, or a mix. Lines of credit grow over time, increasing your borrowing capacity.

Non-Recourse Loan

You or your heirs will never owe more than the home is worth, even if the balance exceeds its value. FHA insurance covers any shortfall.

Flexibility

No strict credit or income requirements beyond ensuring you can cover property taxes and insurance. Use funds for anything from bills to buying a new home without monthly mortgage payments.

Consumer Protection

• Mandatory counseling before loan approval
• Limits on lender fees and interest rates
• FHA insurance to guarantee funds even if the lender fails
• Resources and assistance via the FHA website

Cons of Reverse Mortgages

Initial Loan Costs

Reverse mortgages often come with high upfront costs that are added to your loan balance. Expect:

• Mortgage insurance premiums
• Origination fees
• Closing costs

Annual Costs

Ongoing interest, annual mortgage insurance premiums, and servicing fees increase your loan balance over time.

Possible Reduction of Benefits

If you receive Medicaid or SSI, loan proceeds might count as income or assets, potentially affecting eligibility.

Decreasing Equity

Your loan balance grows as you borrow, reducing the equity left in your home and limiting future financial options.

Ongoing Responsibility

You must continue paying property taxes, homeowners insurance, and maintain the home. Failure to do so can lead to foreclosure.

Are You a Candidate for a Reverse Mortgage?

The following table offers a quick guide to who may or may not be a good fit for a reverse mortgage:

Calculate Your Reverse Mortgage

Use our reverse mortgage calculator to estimate your loan amount, upfront costs, and total loan balance.

Final Thoughts on Reverse Mortgages

Reverse mortgages aren’t ideal for everyone, but they can be a financial safety net for the right homeowner. Evaluate your goals, long-term plans, and financial needs before deciding.

Is a Reverse Mortgage Good or Bad? FAQs

Why do banks not recommend reverse mortgages?

Banks may avoid recommending reverse mortgages due to the higher fees and equity reduction. However, when used wisely, they can be beneficial.

What is the biggest problem with reverse mortgages?

The main concern is reduced home equity and higher loan costs compared to other financing options like HELOCs or traditional refinancing.

Who benefits most from a reverse mortgage?

Borrowers and non-borrowing spouses benefit the most by accessing equity without required monthly payments and staying in the home long-term.