A reverse mortgage is a loan, and as with any type of loan there are benefits and there can be downsides.

What is the downside to reverse mortgages? 

downside to reverse mortgage

A reverse mortgage is a loan, and as with any type of loan there are benefits and there can be downsides.

Here, we will address some of the pros and cons associated with reverse mortgages for those qualifying individuals who are age 62 or older.

The reverse mortgage: a non-recourse loan designed for senior borrowers

The reverse mortgage is a home loan that allows qualifying borrowers to borrow against their home equity. Most reverse mortgages are of the Home Equity Conversion Mortgage type, which means they are insured by the Federal Housing Administration and come with certain requirements.

What are the downsides? 

Like any mortgage, a reverse mortgage carries some fixed costs such as closing costs and other fees. Reverse mortgages also require an upfront insurance premium and an ongoing insurance cost. Some critics of reverse mortgages consider the costs to be a downside, but it’s important to compare those costs with the alternatives, such as those that come with insurance products and other types of loans that may be available.

Weighing the downsides:

  • Fees — a reverse mortgage closing carries fees, like any mortgage
  • Insurance premiums — FHA insurance is paid upfront and annually. It may help to compare the costs of reverse mortgage insurance versus other insurance products or other options you might be considering.
  • Projected equity over time and inheritance for heirs — a reverse mortgage draws down on equity over time
  • Ability or possible need to move in the short team — reverse mortgages are designed for people to remain in their homes. If you are planning to move in the near term, this could be a downside for a reverse mortgage in your situation.

Another downside is potentially drawing down home equity. If you intend to leave to your heirs a home that is paid off in full, then a reverse mortgage may not be the best course of action. However, it’s important to note that any remaining equity that is left after the loan is paid off will be returned to the borrower or his or her heirs.

A reverse mortgage can be a prudent financial move, but the downsides should be considered. For those prospective borrowers who plan to move within several years, there may be a worthwhile alternative as reverse mortgages are designed to help people who plan to remain in their homes.

Requirements: 

  • A HECM borrower must have an age minimum of 62 years old
  • Home equity must be sufficient to qualify
  • The borrower must maintain homeowner’s insurance and property tax payments as well as maintain the home to FHA standards
  • The lender must conduct a financial assessment of the borrower to determine he or she can meet the loan obligations

HECM borrowers must pay insurance premiums associated with the loan, and as a result, FHA insurance provides some important borrower protections:

  • Protections for some spouses of reverse mortgage borrowers
  • The guarantee that a borrower and his or her heirs will never owe more to repay the loan than the home is worth at the time of sale
  • That loan payments will be received as agreed upon under the terms of the loan

The upside:

upside to reverse mortgage

A reverse mortgage can offer many benefits to senior borrowers. Because the loan proceeds can be spent as the borrower chooses, a reverse mortgage can provide financial flexibility and freedom during retirement. For an individual or a couple that needs to make home modifications for aging in place, for example, a reverse mortgage can help pay for improvements.

A reverse mortgage can even be used to purchase a new home through a specific type of Reverse Mortgage for Purchase loan. Some borrowers use their reverse mortgage proceeds to pay for in-home care costs or to help reduce the caregiver burden shouldered by children or other family members. Others simply use the proceeds for a rainy day or an unforeseen health event.

Summary: 

  • Reverse mortgages allow borrowers to tap into their home in the form of a non-recourse loan
  • These loans can offer financial benefits to senior borrowers
  • Reverse mortgages carry some risks and potential downsides, and therefore upfront research can help determine whether a reverse mortgage is the right fit for your situation

Learn more

For anyone considering a reverse mortgage, it’s a good idea to consult a trusted advisor. A good place to start is looking at a simple reverse mortgage calculator to get an idea of the amount you may be able to borrow. Consult ARLO, the All Reverse Loan Optimizer to help gather some of the loan options available in the market today.

Also See:

Reverse Mortgage Advantages and Disadvantages