Warning: Reverse Mortgage Downsides & Disadvantages

September 12, 2023

By Michael G. Branson Edited by Cliff Auerswald 23 comments

A reverse mortgage is a loan, and as with any loan, there are benefits, and there can be downsides. Here, we will address some of the pros and cons of reverse mortgages for qualifying individuals aged 62 and older.

The reverse mortgage is a home loan that allows qualifying borrowers to borrow against their home equity. Most reverse mortgages are Home Equity Conversion Mortgages, meaning the Federal Housing Administration (FHA) insures the loan, providing some guarantees to both the lender and homeowner.

First, the Upsides:

A reverse mortgage can offer many benefits to senior borrowers. 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 provide financial flexibility and freedom during retirement because the loan proceeds can be spent as the borrower chooses.

A reverse mortgage can even be used to purchase a new home through a specific type of reverse mortgage for a purchase transaction. 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 use the proceeds for a rainy day or an unforeseen health event.

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

Protections for some spouses of reverse mortgage borrowers.
The guarantee that a borrower and their heirs will never owe more to repay the loan than the home is worth at the time of sale.
The borrower will receive loan payments as agreed upon under the loan terms when borrowers choose to receive monthly payments.

Reverse mortgage requirements:

A borrower must be a minimum of 62 years old.
Home equity must be sufficient to qualify (the percentage depends mainly on the youngest borrower’s age; see our calculator for results).
The borrower must maintain homeowner’s insurance and property tax payments and keep the home to FHA standards.

Weighing the downsides

Like any mortgage, a reverse mortgage carries fixed costs, such as closing costs and other fees. Reverse mortgages also require an upfront insurance premium and an annual renewal.

Some critics of reverse mortgages consider the costs to be a downside. Still, it is 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.

Costs Continue to be the Reverse Mortgage Downside:

Fees — Reverse mortgages have closing costs, 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 options you might be considering.
Projected equity over time and inheritance for heirs — a reverse mortgage will affect available equity over time.

Another detriment is potentially drawing down home equity. If you intend to leave 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 left after the loan is paid off still belongs to the borrower or their heirs. Like any other loan, the balance is paid, and the property or equity belongs to the borrower or heir(s).

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

Suitability FAQs

What is the downside of a reverse mortgage?

Like any mortgage or financial product, there are upsides and downsides. The downside to a reverse mortgage loan is that you use your home’s equity while alive. After you pass, your heirs will receive an inheritance based on whatever money you use and interest that accrues on the money you borrow. Another possible downside would be regretting taking a reverse mortgage too early in retirement. As you grow older, your needs may change, and eventually, a downsize may be of interest. Make sure you weigh all the pros and cons and consult your trusted advisor on whether a reverse mortgage suits your circumstances.

Is a reverse mortgage ever a good idea?

A reverse mortgage can be outstanding for those looking to tap equity rather than pull from liquid assets in retirement. Many are using available proceeds to fund long-term care and age-in-place home improvements. When utilized correctly, a reverse mortgage can also add great peace of mind by adding additional income for a secure retirement.

Can you lose your house with a reverse mortgage?

As with any mortgage, there is a loan agreement that you must adhere to. Reverse mortgage underwriting guidelines require that the borrower pay property charges on time, maintain the property, and occupy their home as a primary residence. If you fail to do so, the loan servicer may call the loan due and payable and force the borrower to refinance or sell the home. Suppose your loan balance exceeds the current property value at default. In that case, you may lose your home to foreclosure and have no equity remaining, so it is important to keep up with the loan commitments, as you can remain in the home for life regardless of the value as long as you continue to meet the loan terms. As with any financial product, you should seek counsel from your trusted advisor, and careful consideration and suitability should be discussed.

What happens to a reverse mortgage when you die?

Death of the last surviving borrower is a maturity event on a reverse mortgage loan, meaning the loan becomes due and payable. Your heirs must contact the lender to inform them what they intend to do. Lenders will work with heirs to give them the time they need to refinance the loan or sell the property as long as the heir can demonstrate that they are working toward satisfying the loan. Any remaining equity after repaying the loan belongs to you or your heirs. Suppose there is a shortfall in the loan amount to the current appraised value. In that case, you may rest assured that reverse mortgages are non-recourse and cannot transfer the debt to your heirs or estate.

Is a reverse mortgage a scam?

Reverse mortgages are not a scam. Anyone who believes a national government-insured mortgage program such as the HECM (Home Equity Conversion Mortgage) is a scam needs to educate themselves or come real with their audiences. Unfortunately, some people like Dave Ramsey spread this rhetoric and sensationalize a financial product for their gain.

Summary:

Reverse mortgages allow borrowers to tap into their home as non-recourse loans.
These loans can offer senior borrowers financial benefits, offering increased cash flow during retirement.
Reverse mortgages carry risks and potential downsides; therefore, upfront research can help determine whether a reverse mortgage fits your situation.

Where to learn more?

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

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23 Comments on this Article

Sid B.
March 2nd, 2023

I have a reverse mortgage and would like to know if my wife and I can have a relative stay with us?
Reply to Sid
- ARLO™
  March 4th, 2023
  
  Hello Sid,
  It is still your house, and you decide what you do with the home if you meet the loan terms. You must reside in the house as your primary residence and pay all property charges on time (taxes, insurance, any HOA dues you may have, etc.). You must maintain the home in a reasonable manner so as not to impair the security of the loan.
  After that, you can choose to have other family members move in with you if you wish, you can rent out a spare bedroom for some extra cash if that is your desire, or you can choose to sell the home and move to a new location. You still own the home, and the home's equity is yours as well. If you wish to have a relative move in with you, that is your decision and does not violate the loan terms.
  Reply to ARLO
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
- ARLO™
  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 ARLO
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
- ARLO™
  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 ARLO
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
- ARLO™
  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 ARLO
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
- ARLO™
  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 ARLO
Ed Colton
May 12th, 2020

If I want to file an insurance claim and check is paid out to me and reverse mortgage company do I get to keep any overage paid by insurance company after improvements are made?
Reply to Ed
- ARLO™
  May 15th, 2020
  
  Hello Ed,
  The reverse lender should inspect to verify that all repairs have been completed satisfactorily and then sign off the check. If the job is big enough, they may want the funds sent to the repair company, but if you can show them that you have paid for the work, they should have no problem releasing the check to you.
  Before you pay any money to any parties, I suggest contacting your servicer to be sure of what they will need before they release the funds.
  Reply to ARLO
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
- ARLO™
  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 ARLO
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
- ARLO™
  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 ARLO
Michele G.
September 4th, 2019

I was caring for my mother for 22 years and living with her. My brother took out a reverse mortgage for my mother's expenses, she passed away and now I have no place to go because of the reverse mortgage what are my options, I would like to stay in the house.
Reply to Michele
- ARLO™
  September 4th, 2019
  
  Hello Michele,
  
  I am sorry for your loss, but I disagree with your characterization that you have nowhere to go "because of the reverse mortgage". Your brother could not get a reverse mortgage for your mom. He may have helped her with the process but only mom could apply for and receive the loan.
  If she needed the loan and lived in the home for multiple years with the aid of the loan proceeds, that allowed both you and your mom to live there for however long the loan was in place without having to make a mortgage payment for the time the loan was in place. But now the loan is due and payable. As heirs, you and your brother must now decide what is to become of the property, but the loan must be paid off at this time.
  This means that the loan may be refinanced with a new loan, the property may be sold and you can keep the equity in the property or if you mom used all her equity to live in the home and the loan balance exceeds the value of the home, you can still pay off the loan for 95% of the current value even if that is less than the amount owed so you can obtain other financing.
  Or if you are not able or unwilling to finance or sell the home, you can walk away from the house and owe nothing and the lender cannot look to you or your mom's estate to help repay the loan, just the property.
  
  I would strongly suggest that you discuss the situation with your brother at this point and any other siblings or heirs if there are any and determine what you all intend to do. If there are other heirs involved, they too need to consent to a sale or any plans you intend to put into motion to refinance the loan. Your mom obviously needed some help to be able to continue living in the home.
  It seems that your brother and mother discussed this, and the reverse mortgage was the decision they made to enable her to continue to live in the home for life. If they did this planning, they may have also had other plans for when she passed and therefore, it might be best to speak with your brother to see what those provisions were.
  I always advise borrowers to talk to family members before the time comes that they are unable to tell them what they are doing and why -maybe there was a will, trust or other documentation that laid out your mom's wishes that your brother can share with you.
  At any rate, your time available to exercise your options on the home will not extend forever before the lender will begin foreclosure proceedings if there is no progress toward paying the loan off so I would encourage you to talk to your brother and make a plan soon.
  Reply to ARLO
Dee J.
July 10th, 2019

My husband is 62, but I will not be 62 until December. If we had a reverse mortgage now would I be added in December or would I not be able to go on the mortgage?
Reply to Dee
- ARLO™
  July 10th, 2019
  
  You can get the loan now and you would be an eligible non-borrowing spouse which would allow you to also remain in the home for life, but you could not be added to the loan after it closed.
  The downside to this is that if you do not take all the funds at closing to pay off an existing loan, you would not have access to any remaining funds if anything happened to your husband after the loan closed and before you used all the funds available to you.
  If you did take all the funds at closing, there really is no downside to taking the funds now. If you plan on taking a line of credit though, you may really want to wait until December when you can both be on the loan and that way if anything happens to your husband, you would also have full access to the money on the line of credit.
  Reply to ARLO
bob white
July 8th, 2019

i used a reverse mortgage years ago during a rough financial time.Now I sit helplessly by while over 600.00 a month maintaince costs suck me bankrupt.
Reply to bob
- ARLO™
  July 10th, 2019
  
  Hey Bob,
  I don't understand your characterization of your loan circumstances.
  Firstly, the reverse mortgage is a non-recourse loan. You can never be forced into Bankruptcy from a reverse mortgage as the lender has no other recourse other than the property.
  Secondly, if your "rough financial time" has passed, you can begin making payments on the loan at any time and could have at any time.
  The loan has no prepayment penalty so while there is never a payment required if you live in the home, you can choose to make a payment in any amount at any time without penalty.
  I don't know what your interest rate is on your current reverse mortgage, but I would venture a guess it is 5% or less which is significantly lower than any credit cards available giving you a much greater opportunity to right your financial ship than most other forms of credit would while still giving you the financial flexibility of making payments or not to suit your needs in any given month.
  In the end though, only you can determine if the home is too expensive for you, reverse mortgage or no. We do not believe that the loan is right for all people in every circumstance and if even with the loan you are finding yourself short each month, we recommend that you take a serious look at possibly downsizing before you use all your equity, especially if you feel that you are heading ultimately in that direction anyway.
  Reply to ARLO

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