Debunking the Top 10 Reverse Mortgage Downsides

June 17, 2024

Reverse mortgages have long been surrounded by misconceptions, leading many to believe they come with significant downsides. In reality, many of these concerns are based on myths. In this guide, we will debunk the top 10 common claims about the downsides of reverse mortgages, providing you with the clarity you need.

Whether you’re exploring reverse mortgage options for yourself or assisting a loved one, understanding the facts behind these so-called ‘downsides’ will help you make a confident and informed decision.

Table of Contents

• Claim #1: Reverse Mortgages Have Growing Interest and Fees

• Claim #2: Reverse Mortgages Have Complex Loan Terms

• Claim #3: Reverse Mortgages Affect Needs-Based Programs

• Claim #4: Reverse Mortgages Create Repayment Problems for Heirs

• Claim #5: Reverse Mortgages are Rising Debt and Falling Equity

• Claim #6: Reverse Mortgages Have Occupancy Restrictions

• Claim #7: Reverse Mortgages Can Be a Burden on Heirs

•

Claim #8: Borrowers Must Maintain Taxes & Insurance

• Claim #9: Reverse Mortgages Have a Risk of Negative Equity

• Claim #10: Potential for Scams

• Assessing the Upsides & Downsides

• How a Reverse Mortgage Can Enhance Your Retirement

• Suitability FAQs

• Summary: Making Informed Decisions About Reverse Mortgages

Claim #1: Reverse Mortgages Have Growing Interest and Fees

Concern: Skipping monthly payments may seem like an advantage, but the accumulating interest can significantly increase the total loan balance.

Truth: Like any loan, interest accrues on a reverse mortgage. However, one major benefit is flexibility. You are not required to make monthly payments, but you can choose to pay down the interest whenever you want without penalty. This allows you to manage the loan balance effectively and control how much interest accrues over time.

Claim #2: Reverse Mortgages Have Complex Loan Terms

Concern: Reverse mortgages have complicated terms that can lead to unexpected surprises regarding repayment or property use.

Truth: While reverse mortgages have specific terms, they are not inherently confusing. With required counseling, online tools, and supportive lenders, you’ll have the resources to understand the details fully. Plus, you can cancel without penalty if you feel it’s not the right choice for you.

Claim #3: Reverse Mortgages Affect Needs-Based Programs

Concern: Receiving funds from a reverse mortgage could jeopardize eligibility for programs like Medicaid or Supplemental Security Income (SSI).

Truth: While reverse mortgage proceeds can affect needs-based programs, careful planning can help you avoid issues. Most programs consider your assets at the end of the month. By spending funds during the same month they are received, you can maintain eligibility for these benefits. Consult with program counselors to stay compliant with specific requirements.

Claim #4: Reverse Mortgages Create Repayment Problems for Heirs

Concern: Heirs must sell the property or refinance the loan to keep it, potentially causing financial strain.

Truth: Reverse mortgages are not designed to be passed down, but open communication with heirs can prevent complications. Heirs should be informed of their options, such as selling the property or refinancing the loan. Establishing a family trust or consulting an estate attorney can further simplify the process, ensuring heirs are prepared.

Claim #5: Reverse Mortgages are Rising Debt and Falling Equity

Concern: Home equity decreases as payments are received and interest accumulates, leaving less for heirs.

Truth: While equity can decrease if home values stagnate or interest builds, this isn’t unique to reverse mortgages. Unlike traditional mortgages, reverse mortgages are non-recourse loans, meaning neither you nor your heirs are responsible for any shortfall if the home’s value doesn’t cover the loan balance.

Claim #6: Reverse Mortgages Have Occupancy Restrictions

Concern: Moving permanently, such as to a nursing home, makes the loan due, complicating living situations.

Truth: Reverse mortgages have occupancy requirements, but you can be away for up to 12 months temporarily (e.g., for rehabilitation). If permanent relocation is needed, planning early can ensure a smooth transition without undue stress.

Claim #7: Reverse Mortgages Can Be a Burden on Heirs

Concern: Heirs are left to manage repayment and avoid foreclosure under tight deadlines.

Truth: Proper preparation minimizes this burden. By educating heirs on loan terms, authorizing communication with lenders, and establishing clear plans, the process becomes manageable. Early planning ensures heirs know what to expect and how to proceed.

Claim #8: Borrowers Must Maintain Taxes & Insurance

Concern: Failing to keep up with home maintenance, taxes, or insurance could lead to default.

Truth: As with any mortgage, maintaining taxes and insurance is essential. Many lenders offer programs to assist borrowers in managing these obligations. Staying proactive helps ensure your loan remains in good standing.

Claim #9: Reverse Mortgages Have a Risk of Negative Equity

Concern: Declining home values may result in the loan balance exceeding the property’s worth, leaving negative equity.

Truth: Reverse mortgages are non-recourse loans, meaning heirs or estates are not responsible for any shortfall. Heirs can repay the loan at 95% of the home’s current market value or choose to walk away without financial liability.

Claim #10: Potential for Scams

Concern: The complexity of reverse mortgages makes them a target for scams.

Truth: Scams typically involve misuse of proceeds rather than the loan itself. Choosing a reputable, HUD-approved lender is key. Open family communication ensures seniors make informed and secure decisions, avoiding fraud.

Assessing the Upsides & Downsides

Aspect	Upside	Downside
Financial Flexibility	Provides access to home equity without monthly mortgage payments.	Limited options for further borrowing against home equity.
Loan Repayment	Repayment is deferred until the homeowner moves out, sells the home, or passes away.	Can result in less inheritance for heirs.
Income Source	Can serve as a supplemental income source in retirement.	Loan balance can increase over time, reducing home equity.
Interest Rates	Typically allows for a fixed rate on lump sum payouts.	Interest accumulates over the life of the loan, increasing the total debt.
Impact on Heirs	Heirs can choose to keep the home by paying off the reverse mortgage or selling the home.	Heirs might receive less from the estate due to the reverse mortgage borrowed.
Home Ownership	Homeowners retain the title and ownership of the home.	Homeowners are responsible for property taxes, insurance, and maintenance.
Eligibility	Available to homeowners aged 62 and older.	Not available to younger homeowners, limiting accessibility.

How a Reverse Mortgage Can Enhance Your Retirement

A reverse mortgage offers financial flexibility and security, enabling you to enjoy retirement on your terms:

Make Your Home Age-Friendly: Fund upgrades like ramps or walk-in tubs to age in place comfortably.
Spend How You Wish: Use funds for daily expenses, travel, or emergencies—the choice is yours.
Buy a New Home: Relocate to a retirement-friendly property with reverse mortgage support.
Pay for In-Home Care: Cover costs for care while remaining in the comfort of your home.
Create an Emergency Fund: Establish a financial safety net for peace of mind.

Key FHA Protections

Spousal Protections: Non-borrowing spouses may remain in the home under certain conditions.
Non-Recourse: You or your heirs will never owe more than the home’s value.
Guaranteed Payments: As long as you meet loan requirements, payments or credit lines remain accessible.

Suitability FAQs

What is the downside of a reverse mortgage?

A reverse mortgage has both advantages and drawbacks. One downside is that it reduces your home’s equity, which may affect the inheritance your heirs receive. Additionally, taking out a reverse mortgage too early in retirement might lead to regrets if your financial needs change or you decide to downsize later. It’s important to carefully weigh the pros and cons and consult a trusted advisor to determine if it’s the right choice for you.

Is a reverse mortgage ever a good idea?

Yes, a reverse mortgage can be a smart option for those looking to access their home equity without tapping into their savings. It can provide funds for long-term care, home improvements, or enhancing your retirement financial security. When used properly, it offers peace of mind by supplementing your income, making your retirement more secure.

Can you lose your home with a reverse mortgage?

To stay in your home, you must meet the terms of your reverse mortgage, including paying property taxes and insurance and maintaining the home as your primary residence. Failure to do so can result in the loan becoming due, which could lead to foreclosure if you’re unable to meet those obligations. As long as you stay current on these responsibilities, you can remain in your home for life.

What happens to a reverse mortgage when you die?

When the last borrower passes away, the loan becomes due. Your heirs must contact the lender to decide whether to sell the property or refinance the loan. Lenders usually allow time for this process. If there’s equity left after the loan is repaid, it goes to your heirs. And if the loan balance exceeds the home’s value, reverse mortgages are non-recourse, so your heirs won’t be responsible for the remaining debt.

Is a reverse mortgage a scam?

No, reverse mortgages, especially the government-insured HECM (Home Equity Conversion Mortgage), are not scams. Misconceptions often arise from misinformation spread by people like Dave Ramsey, but these loans are legitimate financial tools. Educating yourself and understanding the facts before making any decisions is essential.

Important Considerations on Reverse Mortgages

Summary: Making Informed Decisions About Reverse Mortgages

While reverse mortgages can provide financial relief and greater flexibility during retirement, they have drawbacks and complexities. It is essential for homeowners to understand these aspects fully and to make an informed decision based on their circumstances, plans, and the needs of their heirs. Consulting with a financial advisor, an attorney specializing in elder law, or a HUD-approved counselor can provide valuable insights and guidance.

Have Questions About Reverse Mortgages?

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Access our online calculator: https://reverse.mortgage/calculator.
Call us Toll-Free at (800) 565-1722 to speak with an expert.

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Have a Question About Reverse Mortgages?

Look no further. Michael G. Branson, our CEO, brings a wealth of knowledge directly to you. With a robust 45-year tenure in mortgage banking and 20 years dedicated solely to reverse mortgages, he's the expert you want on your side.

Post your question in the comments below and anticipate a personalized response from Mr. Branson himself, typically within one business day. He's here to illuminate all angles of reverse mortgages, ensuring you're equipped with the knowledge to make informed decisions. Take this opportunity to gain insights from a seasoned professional.

17 Comments on this Article

Marlyn
May 16th, 2024

Hello Michael,

I have an existing reverse mortgage, and after reading your articles, I see that a line of credit associated with a reverse mortgage, as you have stated, is a "growing available amount over the life of the loan." However, my reverse mortgage states that the line of credit is only available within the first 10 years and is limited to an exact dollar amount.

Have I been scammed, or is this correct?

Thank you, your response is greatly appreciated.

Marilyn
Reply to Marlyn
- Michael Branson
  May 22nd, 2024
  
  Hello Marilyn,
  I don't think you were scammed. It sounds to me like you received a loan other than the HUD HECM reverse mortgage. Not all reverse mortgages are the same. We usually talk about the HUD program because it is the most common and, until recently, the most popular. However, the jumbo or proprietary programs are becoming increasingly popular as borrowers either don't meet HUD's guidelines or their property is valued higher than the HUD limits. If the program you ended up taking was one of those private programs, you would be subject to the parameters of that program.
  The private programs require their own counseling protocols and loan documents, which are conducted using their specific loan terms. While I cannot comment assuredly because I was not present for your counseling nor have I seen your documents, the amortization schedule presented to you in advance and all of the documentation should support a 10-year draw period if that is what your loan program offers. If you review your package and the disclosures and documents you received and signed prior to closing your loan do not support a 10-year draw, you should contact your lender.
  Reply to Michael
Felix O.
March 16th, 2024

We bought a house for $200,000 and now it's worth over $700,000. The home is paid off. We have a solar system loan $25,000 and about $10,000 in debt (we'll start paying interest on the $10,000 in December if not paid in full). I'm 68, retired and my wife is 63. She plans to retire at 65. We were thinking of obtaining a reverse mortgage to pay for the solar loan, the $10,000 debt, buy a small plug-in hybrid car and get hurricane impact windows...about $125,000 reverse mortgage loan. Is that advisable? Thank you.
Reply to Felix
- Michael Branson
  March 19th, 2024
  
  Hello Felix,
  Will it work? Yes. Is it advisable? That depends on your goals and further circumstances. Do you want to leave a home free of liens to heirs? Then it may not be advisable unless you also set up a plan to make payments on your loan. Many people don't know that while no payments are required on a reverse mortgage, you can choose to make payments in an amount up to and including payment in full at any time without penalty.
  Do you love your home and plan to stay there for the rest of your life, or do you think you want to move soon because your home does not meet your needs? A reverse mortgage is a great financial planning tool, and the line of credit grows over time on the unused portion of the line, meaning you will have more money available to you later if you don't use all the money now, but if you think you will need to move in a few years, a reverse mortgage is not a good short term option.
  Only you know your needs and intentions. Knowing what the loan will and won't do will allow you to make an informed decision though.
  Reply to Michael
JoAnne
December 30th, 2021

I'm a widow living on my social security. I think I understand how this works; If I use a reverse mortgage to supplement my monthly income, I should take a lump sum and put it in a savings account and draw off of it. Then, at "the end of the road", whatever money is left in savings and the sale of my home is used to pay off loan, right?
Reply to JoAnne
- Michael Branson
  January 11th, 2022
  
  Hello JoAnne,
  I advise you to talk to a financial planner and any family members you have available, but that is not the strategy I advise. If you plan to augment your income, I suggest that you borrow what you need, as you need it.
  While reverse mortgage interest rates are not high, they are higher than the interest you would receive on the money you placed into a bank account. By taking a lump sum draw and putting cash into a bank account, you would lose money every month as you accrue more interest on the money you borrowed than you would earn on the cash in the bank.
  Also, a growth feature on the line of credit allows the money left in the line of credit to grow on the unused portion of the line. If you borrow all the money, there is nothing left to grow. The growth is not interest anyone is paying you. It is like an increase in your borrowing ability, which means that later, if you need more money because you have medical expenses or for whatever reason, more money will be available.
  If you never borrow it, you or your estate (heirs) never accrue any interest on the funds and never have to repay them. However, if you do need them, they are available to you. If you borrow 100% of the funds available, you can remain in the home if you adhere to the reverse mortgage provisions but there would never be any additional funds available on that loan (you might be able to refinance later and get more funds but that is never guaranteed) and you would accrue the most possible interest on the loan cutting into your equity.
  You can always take the remaining funds from the equity line at any time if you feel you need them later, but if you take them gradually early in the loan, you accrue less interest and grow the line, which allows you access to the most possible funds later.
  Reply to Michael
Don P.
June 10th, 2021

Reverse mortgage was a life saver. First a $500 payment went away, thus a $500 income increase (penny saved etc.). We got a lump sum to get right with the world, and a line of credit. The line of credit grew at the rate of the loan, so I started using it as a savings account. My bank is giving me .01% and the line of credit is growing at 4.37%. If I must draw from the line of credit, there is no tax as it is a loan.

With 8 kids, all better off the us, will just have to deal with whatever happens. At least they have no need to care for us. We have refinanced our reverse mortgage once and are right now looking to do it again. We may have to wait another year or two, but I'll take it out when I can.
It's not for everyone, but it sure works for us.
Reply to Don
Elma C.
August 4th, 2020

My husband and I are both 75 years old and I need a Reverse Mortgage to buy a franchise for $70000. After I buy the business I like to pay the reverse mortgage monthly like $2000.00 per month. Is this a good idea?
Reply to Elma
- Michael Branson
  August 14th, 2020
  
  Hello Elma,
  I would tell you that you should seek the counsel of a financial advisor to determine if it is a "good idea" based on the franchise, the returns expected and shown historically, etc., but I can tell you that it is something you absolutely CAN do.
  If you were to take a line of credit with an initial draw of $70,000, the loan requires you to make no monthly payments, but you can make any payment in any amount you desire at any time.
  If you choose to do this, payback almost the entire amount owed but leave a very small balance of just a couple hundred dollars on the loan unpaid.
  The interest that will accrue will be miniscule, but you will have a line of credit available to you always, and that line will grow on the unused portion, meaning you will have a larger line available later should you ever need it.
  If you pay it down to a 0 balance, the line will be closed and paid in full, but if you leave a very small balance owing on the line, it will remain open and available to you for life as long as you remain living in the home.
  Reply to Michael
David H.
June 4th, 2020

Reverse mortgages have mostly downsides and few true upsides. The big unmentioned downside is that, unlike when the homeowner was making his mortgage payment every month which was mostly interest and little principal, in a reverse mortgage the bank is not paying the homeowner any interest. It is, essentially, a free loan to the bank.
Reply to David
- Michael Branson
  June 8th, 2020
  
  Hello David,
  I do not follow your reasoning. The bank does not pay any interest to the borrower on any loan.
  If you do not make any payments, there is no principal reduction, which is entirely within the borrower's control. While there are no payments due with a reverse mortgage, there is never a prepayment penalty, and borrowers can pay any amount at any time without penalty up to and including payment in full.
  You could make payments if you wanted the loan to accrue interest like a normal forward or traditional mortgage. The loan would accrue interest or pay down exactly as a forward loan would. Then, you would still know that you never had to make a payment at any time. It would be entirely voluntary.
  If you had months where you could not make a full payment or before the 15th of the month, there would be no negative consequences, late fees, or credit because there is no payment due in the first place.
  Reply to Michael
Teresa C.
May 26th, 2020

I inherited my family home after both of my parents passed. I would like to take a home equity line of credit in the home for upgrades and pay off a few bills and medical expenses and some reserve emergencies. The house has no current mortgage on it. But my credit is less than perfect and I work and make about $40,000 a year I really only want about $60,000. Want my payments t to be easily doable. As I plan to leave the house to my children, but I am only 59 years old do you have any ideas
Reply to Teresa
- Michael Branson
  June 2nd, 2020
  
  Hello Teresa,
  We do not offer Home Equity Lines of Credit, strictly reverse mortgages.
  Depending on how bad your credit is, you may find that the line of credit is still available, and I suggest you check with your local bank. You may find that when you turn 62, you want to pay the loan off with a reverse mortgage even if you want to leave the home to your heirs, and here is why.
  You can still make payments with a reverse mortgage, which would keep the loan balance from rising or even pay enough to pay it down or off, but you are not required to. If you miss a month or cannot make a full payment in any given month, there are no problems because there was nothing "due" in the first place.
  There is no draw period followed by a repayment period on a reverse mortgage so that you won't go for 10 years at interest, only then be hit with a larger payment when the loan goes into the repayment period of the loan (after you are no longer working).
  If you sit down before taking the loan, you can decide how much you want to pay, how much you want to pay back, and what payments are comfortable for you.
  Then, as long as you stick to your plan, you will always know what you owe and what asset is available to pass to your heirs (always subject to interest rates and home appreciation, of course).
  Reply to Michael
Gwen C.
April 24th, 2020

My husband and I are considering doing a reverse mortgage. We have no intention of selling our house, ever. I have retired and my husband is going to retire in August. So let's say we go ahead with a Reverse Mortgage and decide to turn around and pay it off. Does that mean we have the entire loan amount sitting in an account accumulating interest?
Reply to Gwen
- Michael Branson
  May 3rd, 2020
  
  Hello Gwen,
  The reverse mortgage amount available to you grows on the unused balance, but that is not "interest" being paid to you. Think of the line growth rate more like an increase in your credit limit. If you had a credit card with a limit of $10,000 and the lender raised your limit to $20,000, you would have more money available to spend, but they didn't give you $10,000. If you did spend the money, you would owe it and begin to accrue interest owed (not earned) on the money you spent for as long as it remained outstanding on the line.
  This is like how the reverse mortgage line of credit works. If you have $100,000 available on your line, your interest rate is 3%. You pay .5% for mortgage insurance premium (MIP) renewal, your line will grow on the unused balance at the same rate as the interest plus the MIP accrual rate or, in this example, 3.5%. So, at the end of the year, your line would be $103,500 and not $100,000. No one paid you $3,500. You have more money available to you now. In the second year, your growth would be based on the new balance and the interest rate.
  You can see that if you don't use the line for several years, you can accumulate quite a bit of extra borrowing power for later on when you need it the most. Your available line may increase considerably, but this is greater borrowing power, not interest you earn on anything. If you never borrowed it, it never has to be repaid (by you if you sell the house or later by your heirs). Also, no interest accrues on funds available but not used if not borrowed. You do begin to accrue interest on funds once you borrow them.
  There is never a prepayment penalty, you may repay any amount without penalty. The only thing I would caution you about is that if you want to keep the line open, be sure not to pay the loan down to a zero (0) balance (even a $100 balance will do), as that would cause the lender to close the loan at that time. Unlike a Home Equity Line of Credit or a credit card, the loan will not remain open with a zero balance.
  Reply to Michael
Kimberly
September 4th, 2019

My father has a reverse mortgage on his home, he has left me the home in his will, I've lived in the home with him the past 5 years paying the property taxes. What steps can I take now while he's still in good health to be able to keep and stay in the home after he passes? I have a steady job, but I don't have great credit and I'm worried I don't make enough money to pay the reverse mortgage. Will I lose the home? I don't want to sell it unless I have no choice.
Reply to Kimberly
- Michael Branson
  September 4th, 2019
  
  Hello Kimberly,
  
  The $64 question is can you afford the home, and can you qualify for a loan to refinance the reverse mortgage? If so, you are halfway there. Knowing this is the plan, begin to work on any credit issue you have now. There are many things you can do to raise your credit scores and if this is your goal, start that process now.
  Also, sit down with your dad and have a heart to heart conversation about what will happen when he passes. A will alone is not enough. Dad can set up a trust easily and make you a successor trustee then put the home in the trust so that title of the home passes to you should something happen to him.
  
  I am not an attorney! Seek out the assistance of a good estate attorney, it's not as expensive as many things and it will save you in the long run. From the lender's point of view, do not change the title of the home into the trust until AFTER you send the new trust to the servicer and they approve it -then have a local title company or title attorney change the title to avoid any possible issues with taxation if it is not done correctly.
  These are all steps that are easy to take now while dad is in good shape and of sound mind that can be very difficult after he passes.
  Reply to Michael

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Debunking the Top 10 Reverse Mortgage Downsides

Claim #8: Borrowers Must Maintain Taxes & Insurance

Claim #1: Reverse Mortgages Have Growing Interest and Fees

Claim #2: Reverse Mortgages Have Complex Loan Terms

Claim #3: Reverse Mortgages Affect Needs-Based Programs

Claim #4: Reverse Mortgages Create Repayment Problems for Heirs

Claim #5: Reverse Mortgages are Rising Debt and Falling Equity

Claim #6: Reverse Mortgages Have Occupancy Restrictions

Claim #7: Reverse Mortgages Can Be a Burden on Heirs

Claim #8: Borrowers Must Maintain Taxes & Insurance

Claim #9: Reverse Mortgages Have a Risk of Negative Equity

Claim #10: Potential for Scams

Assessing the Upsides & Downsides

How a Reverse Mortgage Can Enhance Your Retirement

Key FHA Protections

Suitability FAQs

What is the downside of a reverse mortgage?

Is a reverse mortgage ever a good idea?

Can you lose your home with a reverse mortgage?

What happens to a reverse mortgage when you die?

Is a reverse mortgage a scam?

Summary: Making Informed Decisions About Reverse Mortgages

Have Questions About Reverse Mortgages?

Have a Question About Reverse Mortgages?

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