Reverse Mortgages: Pros and Cons Every Senior Should Be Aware Of

Monthly bills, groceries, medical expenses – for seniors without a steady source of income or a nest egg of savings to rely on, retirement can be a financially difficult time. If you’re a senior with a home paid for in full, you may be considering a reverse mortgage to tap into the home equity you’ve worked hard to build up over the decades.

Reverse mortgages are a type of financing designed specifically for seniors who are 62 and older with a sizeable amount of home equity. Think of it this way, they’re the opposite of a traditional mortgage: instead of making monthly payments to your lender towards your home loan, your lender will pay for a lump sum of cash or monthly payments that’s taken directly from your home equity. Most reverse mortgages are FHA-insured Home Equity Conversion Mortgages, often called HECMs.

Unlike home equity loans, home equity lines of credit or refinancing your mortgage, you’re free from making any monthly payments towards your reverse mortgage. You’ll repay your reverse mortgage when you move out, sell your property or pass away.

Reverse mortgages are great for cash-poor seniors with their lifetime earnings tied up in bricks and mortar. It’s no wonder reverse mortgage case numbers reached their highest level in two years in October 2024.

But reverse mortgages aren’t for everyone. If you’re considering taking out a reverse mortgage to add some breathing room to your budget, here’s an in-depth look at the pros and cons to help you better understand whether it’s the right option for your financial needs.

Pros of reverse mortgages

1. They provide you with a source of income

The main reason why seniors opt for a reverse mortgage is to receive funds to pay for day-to-day living. If you do not have cash savings, a retirement nest egg, or other sources of income, tapping into your home equity can help.

A reverse mortgage turns your home equity into usable funds without adding another monthly loan payment.

You can set up your reverse mortgage as a single lump sum, monthly payments deposited into your bank account, a revolving line of credit you can draw on as needed, or a mix of these options.

2. They help you stay in your home

While downsizing or moving to a retirement residence are options on the table, if you prefer to stay in your home, a reverse mortgage can help you do that.

For HECMs, the home must be your principal residence. You must keep the property in good condition and stay current on homeowners insurance and property taxes. You can qualify even if you still have a small forward mortgage, as long as it is paid off at closing, often with reverse mortgage proceeds. The loan typically comes due when you sell the home, move out permanently, transfer title, or the last borrower passes away.

If you see yourself growing old in the property while covering bills and typical expenses, a reverse mortgage can help you age in place.

3. They help you pay off your existing home loan, making you mortgage-free

You can use reverse mortgage proceeds to pay off the remainder of your existing mortgage at closing. That eliminates a monthly payment and can free up cash flow, though it reduces remaining equity available to you.

4. They can pay for repairs or medical expenses

You should only apply for a reverse mortgage for a just cause, such as groceries, bills and daily expenses. But you can also tap into your home equity for immediate and pressing financial needs, such as paying off other debts, medical expenses or for home renovations, according to the National Council on Aging.

You could, for example, choose to add renovations to your home to help you age-in-place. These kinds of upgrades are costly, but your reverse mortgage should comfortably foot the bill, helping you retire comfortably in your own home.

You should not be using a reverse mortgage to pay for leisure or extras, such as vacations or nonessential items.

5. They don’t come with tax liability

Another major perk of reverse mortgages is that they are factor in as a loan advance and aren’t considered income, according to the Internal Revenue Service (IRS). This means that you won’t owe any income tax on the cash you receive from your reverse mortgage. This also sets it apart from other retirement income like a 401(k) or IRA.

6. They protect you in case your balance exceeds your home’s value

There’s a great caveat in the setup of reverse mortgages that protect you, and your heirs.

If, when the loan is due, your balance is higher than the home’s value, you or your heirs can satisfy the debt by selling the home for at least 95 percent of its appraised value. FHA insurance covers any shortfall.

Cons of reverse mortgages

1. They’re expensive

From loan origination fees to closing costs and insurance premiums, you’ll find that setting up and maintaining reverse mortgage is a costly endeavor. This is not a cheap way to borrow money, even if you’re using your own home equity.

These expenses don’t even include the accruing interest and monthly servicing fees you’re on the hook for.

For HECMs, HUD caps the origination fee. The cap is the greater of 2,500 dollars or 2 percent of the first 200,000 dollars of the maximum claim amount, plus 1 percent of any amount over 200,000 dollars, with a 6,000 dollar maximum. HECMs also include a 2 percent upfront mortgage insurance premium and a 0.5 percent annual premium.

You can roll all of these costs into your reverse mortgage loan, but they’ll take away from your home equity significantly.

2. They leave your heirs with less financial help

If you wanted to leave your spouse, children and grandchildren a nest egg to help them with their finances, you may leave your family members with less money after your reverse mortgage is paid off.

Remember, while you won’t have to pay a penny of your reverse mortgage back until you pass away, move or sell your home, all of these accumulating expenses need to be paid off.

You – or your heirs – must repay the full loan balance or 95 percent of the home’s appraised value, whichever is less.

Be careful about how much home equity you’re tapping into, especially if you want to leave some to your heirs.

3. They put you at risk of foreclosure

To qualify and retain your reverse mortgage, you must jump through a series of hoops to show lenders you’re a reliable borrower. This includes being able to afford your annual property taxes, homeowners’ insurance, HOA fees and any other recurring costs, such as your mortgage insurance premiums.

If you end up delinquent on any of these expenses or don’t meet these requirements, you could default on your reverse mortgage and lose your property to foreclosure.

With the roof over your head in question, these are really high stakes. You must make sure you’re fiscally responsible and organized with your bills.

4. They could affect your other retirement benefits

Before proceeding with a reverse mortgage application, homeowners must complete an HUD-approved 90-minute financial counseling session. The course is tailored to help you understand what you’re committing to with a reverse mortgage, including the implications this kind of loan may have on your overall finances.

It could affect whether you qualify for other needs-based government funding programs, such as Medicaid or Supplemental Security Income. You must triple check if you need federal help, what you qualify for, and if a reverse mortgage could tamper with this kind of financial assistance.

5. They’re hard to qualify for

The eligibility criteria for a reverse mortgage is limiting. For starters, you must be 62 years old, at least, with at least 50 percent home equity, no federal debt, plenty of savings, and you must stay in the home as your primary residence.

You could be a snowbird, choosing to spend your winters with children in warmer parts of the U.S., or you could be just under the age threshold, deeming you ineligible for this kind of financing.

Take stock of these factors that may be hindering you from applying for a reverse mortgage. If you jump into a reverse mortgage at 62 years old, for example, you’ll need to keep a tight budget to make sure you don’t run out of funds over the years.

And if you like to travel during your senior years, a reverse mortgage may hold you back from visiting loved ones.

Bottom line

Reverse mortgages are excellent financial tools for seniors with little in their savings accounts and no income to pay for their monthly expenses. You can tap into your home equity without selling your home, you won’t have to repay a penny until you move out, sell your property or pass away, and the income you receive is tax-free.

Those are great benefits, but on the flipside, reverse mortgages are an expensive way to borrow. They also put you in a precarious position because you may end up in foreclosure, and they eat away at the home equity you may want to leave your heirs.

Before applying for a reverse mortgage, consider how this kind of financing could affect you or your family in the long run. Also think about how long you plan on staying in your home, and if other options will better suit your needs. You can also downsize, refinance your mortgage, or even scale back your budget to save cash.

Talk to a financial advisor about whether a reverse mortgages makes sense for you, and make sure you shop around to compare reverse mortgage lenders and their interest rates.

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