4 Times a Reverse Mortgage is a Good Idea (or even great!)

May 25, 2022

By Michael G. Branson Edited by Cliff Auerswald 19 comments

Whether or not to get this loan isn’t universally a “good idea” or “bad decision” – many different factors need to be considered.

In this article, we unpack 4 considerations to determine if a reverse mortgage could be the right loan for you.

4 Compelling Advantages of Reverse Mortgages

1. Get breathing room for your budget

A reverse mortgage could be a good idea if you’re “house-rich but cash poor.” In other words, you own your home outright (or have paid off the bulk of your mortgage) but don’t have much cash flow.

If you have a significant amount of home equity but not a whole lot of ready cash in your bank account, it could make sense to utilize your available resources by tapping into that equity.

For example, if your budget is strained by ongoing monthly expenses such as medication, food, or utility bills, getting a reverse mortgage can help cover your everyday living costs and give you some breathing room in your budget while allowing you to remain in your home.

In another scenario, you still owe quite a bit on your current mortgage, and a reverse mortgage will only give you enough to pay off your existing loan.

Some might ask why this would make sense if you can’t get any money out of the house, but for others, it could be a good idea to take out a reverse mortgage in a lump sum and pay off your mortgage once and for all and be able to breathe easier knowing there are no more monthly mortgage payments.

You would still be responsible for paying your taxes and insurance, but could you eliminate your monthly mortgage payment? So that you know, only you can decide that.

2. No income requirement – alternative to HELOC

Suppose you want to make a home. Repairs or alterations to make it more livable and realize that to do the work, it will be necessary to take out a line of credit for certain expenses.

Suppose you don’t qualify for a Home Equity Line of Credit (HELOC) because of income or credit requirements, as many senior borrowers on fixed incomes are now finding. Many homeowners get to that point where they need a home.

With the reverse mortgage line of credit option, you won’t need to worry about typical qualification requirements. And you don’t have to worry about whether or not things will get too tight in your budget by sending monthly payments to the bank since there are no monthly mortgage payments on the loan.

3. Preserve retirement assets

It would be best to talk to your financial adviser about using a reverse mortgage as a viable financial tool. Many portfolios have seen extreme declines in value, and people are hesitant to lock in losses by selling out of those investments at a low point, thus depleting retirement assets.

With the careful planning and advice of your financial expert, the reverse mortgage allows you to continue to live in your home without depleting your assets.

Remember that this is not financial advice and that only you and your trusted financial advisor can make this decision…but the reverse mortgage gives you another option to consider.

4. Improve the quality of retirement

And then you don’t necessarily have to struggle to make ends meet to consider a reverse mortgage either. You could take out a line of credit if you encounter unexpected expenses, use it for Christmas gifts for your grandkids, travel, or whatever you choose.

You can use a little and keep your costs down with the HECM line of credit to preserve equity for family and heirs, or if you don’t have any children or heirs and don’t have a plan for your home for after you’ve passed, then a reverse mortgage could be used as a way to improve the quality of your life in your retirement years.

It’s entirely up to you. So while a reverse mortgage isn’t universally a “good” idea for everyone, there are plenty of situations and circumstances where getting one of these types of loans could positively impact your life.

4 reasons not enough? Here are 6 more:

10 Reasons Why Someone Would Get a Reverse Mortgage

4 Crucial Drawbacks of Reverse Mortgages to Consider

1. If you plan to sell your home and relocate to another area in the near future

A reverse mortgage is a loan designed for borrowers who wish to remain in their homes and free up property equity to eliminate their current mortgage payments, and other debts, enhance retirement funds or fund private healthcare matters, etc.

If your ultimate goal is to relocate to another area to be closer to family or downsize to a smaller home, a reverse mortgage may not be the best option for you as the reverse mortgage balance will rise over time.

2. If you are on government-sponsored programs such as Medicaid

Specific programs such as Medicaid have guidelines for individuals involved in the programs based on their income and available assets. Taking out a reverse mortgage loan and accessing large sums of cash from the home’s equity may invalidate an individual’s ability to qualify for such programs.

If you’re a recipient of needs-based programs such as Medicaid or SSI.

3. If you still cannot afford the Taxes and Insurance, you need to consider other alternatives

You are still responsible for paying the property taxes and hazard insurance and maintaining your home, even though you no longer have monthly mortgage payments. If this is still a struggle and you cannot afford to live comfortably, even after you get a reverse mortgage, you must make some hard decisions; sooner is better than later.

A reverse mortgage will allow you to live in your home for the rest of your life as long as you can maintain it and pay the taxes and insurance. If you cannot, eventually, you will default on the taxes and insurance, which would also be a default on the reverse mortgage loan.

Suppose this is inevitable because you still cannot afford them. In that case, even though no one wants to move out of the house they love, it may be time to make that tough decision before a default situation, and you have even less equity to re-establish yourself elsewhere.

4. If your health is poor and you do not think you can remain living in the home

The terms of a reverse mortgage require you to live in the property as your primary residence. If you are already in poor health and looking into possible long-term care in the near future, a reverse mortgage may be the wrong choice for you as your loan wouldn’t allow you to live outside the home for more than 12 months.

Top FAQs

Are reverse mortgages good for me?

Reverse mortgages aren’t inherently good or bad! It’s only good if the loan serves your long-term retirement goals. Please get all the information about your circumstances, talk with your trusted financial advisor, and make the right decision.

When is taking a reverse mortgage a bad idea?

Reverse mortgages are not advised when you will be in your home for a very short time, if the loan will not allow you to live comfortably even after getting the loan, or if you were considering putting your equity at risk with a risky or questionable investment or financial venture (i.e., annuities).

What is the downside of a reverse mortgage?

The downside of reverse mortgage loans can be the associated costs. Also, if you want to leave the largest asset possible for heirs but cannot make any monthly payments on the loan, you will lower the equity in the property you go to your heirs.

What happens if you outlive your reverse mortgage?

There is no adverse problem with “outliving” reverse mortgage funds availability. You may not have any additional funds left to draw if you use them all and are still living in the home, but you can remain in the home mortgage payment free for life.

What are the typical complaints about reverse mortgages?

Typical reverse mortgage complaints include erosion of equity and the cost of the loan. Compared to other loans and the payments you make, there is not as significant a disparity as people would believe. The entire repayment is made when you leave home, making it appear to be a more significant cost (but it also gave you use of those funds instead of making payments all those years).

ARLO recommends these helpful resources:

America's #1 Rated Reverse Lender Celebrating 19 Years of Excellence.

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19 Comments on this Article

Sylvia
May 9th, 2023

Is it better to get a reverse mortgage while my husband is still alive? Or after he dies?
Reply to Sylvia
- ARLO™
  May 9th, 2023
  
  Hello Sylvia,
  
  Unless your husband is a lot younger than you, there would be no reason to wait.
  If he is younger, you will receive less benefit from the loan, but if he is the same age or older, you will receive the same amount, and there is no downside to getting the loan, even if he predeceases you later.
  Reply to ARLO
Charles B.
March 31st, 2023

Hello Arlo,

Is a reverse mortgage a good thing if my home is mortgage free? Also, is the line of credit tax deductible?
Reply to Charles
- ARLO™
  April 1st, 2023
  
  Hello Charles,
  
  I tell everyone that a reverse mortgage is good or bad, depending on your goals and circumstances. The loan is not inherently good or bad for all borrowers or those with or without a mortgage on their home. For instance, the line of credit on a reverse mortgage grows over time on the unused portion. This means that if you get the loan and use it sparingly or not at all in the early years of the loan, the line or amount available to you increases so that you will have more money available later in the term of the loan. You don't accrue any interest owing on the funds while you don't use them.
  Still, the line available to you is growing so that later in life, if you need or want that money, it is not only still available to you then and cannot be frozen like a HELOC line of credit from a bank, but the amount available will increase as time goes on. And while there are no payments required on the loan for as long as you live in the home as your primary residence (and pay your taxes, insurance, and any other property charges like HOA dues in a timely manner), there is never a prepayment penalty on the loan so you can voluntarily pay any amount at any time up to and including payment in full without penalty. In that case, it might make perfect sense to get the loan whether you have paid all current loans off or have a current need for the funds.
  
  On the other hand, if you know the home no longer meets your needs and you think you will probably sell the property in the near future, I would not suggest you get the loan. Borrowers who feel they need a smaller home, need to be closer to family or medical services, or need a one-story home to replace their current two-story home may want to think twice before investing in a long-term loan such as a reverse mortgage. Some borrowers who know they will be moving in 3 - 5 years still get the loan out of necessity, but that would be based on their circumstances.
  
  Regarding interest, I am not an accountant and cannot give you tax advice. It would be best if you spoke with your tax professional because tax laws change constantly, and I do not want to steer you wrong (not to mention the fact that licensing laws specifically state that I cannot provide tax or legal advice unless I am licensed to do so and I am not). I can tell you that the reverse mortgage is a loan and that interest on a loan, when deductible, is typically deductible when paid. Again, it would be up to your specific circumstances as defined by tax laws as to what is deductible, so I would need to refer you to your tax professional for that information in your case.
  Reply to ARLO
Dee
August 15th, 2021

Dear Arlo,

Believe me when I tell you a reverse mortgage is a bad idea. First off, they low ball you on the appraisal. Then they will give you only half of what it's worth. Out if that money you need to repair your home to meet their standards. You must paint your home if there is any chipped paint, you must put in new windows if they do not meet their specifications. Put on a new roof if they do require then you get whatever money is left. You can choose to not make payments, then they get your property when you leave it or die. So, if your house is worth $100,000, then they give you $50,000 and out if that you must spend $30,000 on repairs made to your home to meet their standards then you have a whopping $20,000 for your lavish retirement. So, they give you $50,000, you get $20,000 out if that but you give them your home for $100,000. Don't sound so great to me. You see it really is a trick to get your home. And without a doubt does take advantage of any senior who decides to get a reverse mortgage because they feel it's their only choice.
Reply to Dee
- ARLO™
  August 15th, 2021
  
  Hello Dee,
  
  I'm sorry you feel that way but without realizing it, you only echo what we have been saying. This loan is not for everyone. If your home is in such disrepair that you need to make heavy repairs just to be able to close the loan and then it doesn't give you sufficient funds to enjoy your retirement as you would like or need, then it isn't the loan for you.
  Contrary to your feelings, lenders and HUD do not want your house but they also do not want to be left with a property that is not marketable requiring massive repairs to liquidate should your heirs not want the home at the conclusion. Therefore, HUD does have minimum requirements the property must meet to be eligible for the program. So, if this is the case for you and you are still not able to be comfortable with the home, the repairs, and your finances after the loan closes, we would advise against you getting the loan.
  Other people may have the income to live comfortably but just not the resources to make necessary repairs or updates who would be very pleased to be able to live for the rest of their lives in their home comfortably but that is for each borrower to decide based on their own circumstances. In your case, you may be better off selling and using your equity to fund your retirement instead. People need to weigh the cost of living elsewhere (there will be a mortgage payment if you buy or if you take out another type of loan) or rent if you are a tenant somewhere.
  
  They also need to factor in the attachment they have for the home in which they currently live and the cost to sell and move if that is what they want to do. And you mentioned that you can make a payment if you choose on a reverse mortgage which is the truth if you desire and that would preserve your equity if that were your goal, but the whole point is you are not required to make any payments with a reverse mortgage.
  Borrowers who take out traditional financing MUST pay that monthly payment every single month or they risk credit problems or possible foreclosure. And then after a typical forward mortgage, you wind up paying a big chunk of your home's value in interest over that time anyway. The difference is that you paid it in monthly payments so it wasn't one big payment at the end.
  
  Finally, you could not be more wrong about lenders "low-balling" appraisals. Under state and federal laws as well as HUD rules, lenders cannot even mention a value to an appraiser, or the appraiser will cease the assignment immediately and report the individual and the lender.
  In fact, the laws and rules were enacted around 2009 for both forward loans and reverse mortgages because HUD, Government Sponsored Entities like FNMA and FHLMC and regulators felt that lenders were putting too much pressure on appraisers to increase values, not suppress them. Any violation is considered a violation of state licensing laws and lenders and individuals can lose their licenses and their ability to originate loans. The Appraisal Institute has a written explanation of Appraiser Independence Laws online at https://www.appraisalinstitute.org/assets/1/7/appraiserindependencelaws.pdf. The lender can help the borrower submit a rebuttal if the borrower believes the value is too low by giving the appraiser additional information or corrections to mistakes in the appraiser's report (if there is any), but they cannot suggest a value even if errors are discovered.
  It's still up to the independent appraiser to determine the value, not the lender. Any attempt to influence the value is a reportable offense. What you fail to understand is that the reverse mortgages are HUD insured against loss. Lenders are pleased when values are supported at the homeowner's expectations because the transaction goes much more smoothly, and the lender doesn't need to have the very uncomfortable conversation with the borrower that the property did not appraise for the value the borrower was expecting. No originator would intentionally try to make the transaction harder or even risk cancellation to try to low-ball a value when the higher value is insured and helps the borrower and the lender close the loan.
  
  As I started by saying, reverse mortgages are not for everyone. We readily admit that and if the loan does not answer your needs and meet your goals, we would agree that it is the wrong loan for you.
  However, your reasoning is off and to simply make a blanket statement that it is a bad idea based on that faulty information or based on circumstances that are not present with all cases, is just as irresponsible as someone who says that all borrowers over the age of 62 should get a reverse mortgage.
  Reply to ARLO
Cynthia V.
December 17th, 2020

Thank you for your excellent information. I have a reverse mortgage on my home and love it. Am I able to refinance my reverse mortgage after a certain amount of time?
Reply to Cynthia
Glenda T.
February 14th, 2020

Reverse mortgages can be very risky.. appraisal fees are high and must be paid by homeowners up front. Cash received depends on that appraisal.
Reply to Glenda
- ARLO™
  March 3rd, 2020
  
  Hello Glenda,
  The appraisal cost for a reverse mortgage is the same as any FHA loan, it is not higher than any other FHA appraisal.
  
  But having said that, you are correct, the amount you may receive, like any other loan, is dependent on the appraised value of the property.
  
  We always do a review of the property and sales in the area to determine a "ballpark" value whenever that is possible to see if the borrowers' opinion of value is reasonable.
  
  The reason I say "whenever possible" is not because we skip this step sometimes, but because there is not always information available to us to review. Some areas do not post sales data online and we cannot see recent sales prices for similar homes.
  
  Sometimes we run across situations where there are no recent sales of similar homes and we just cannot determine a probable value.
  
  And then, most of the time, there are sales available and we can tell borrowers what those sales were so that the borrower can see for themselves the sales prices of similar properties.
  
  This is the main thing an appraiser will use to determine your value and then adjust those sales prices for dissimilar factors (age, condition, size, etc.) if the adjustments are not too great.
  
  If the appraiser must adjust a sale for too many dissimilar factors, then HUD feels the home is not comparable to yours and that the appraiser should have used a different property.
  
  It is very easy when you have houses that are similar ages, same size and bedroom/bathroom count and in similar condition that sole recently to get a good idea what an appraiser will assign for a value within a tight range.
  
  It is much more difficult when there is no recent sales data available or the only properties that have sold are very different from the borrower's house.
  
  So in those instances, any appraisal can be "risky" if you are depending on a value that cannot be substantiated by recent sales of similar properties as it will be in the hands of the appraiser and we may not have a good grasp on what that might be in advance.
  
  If you are concerned about the value of your home though, I would suggest that you review the recent sales of properties that are really similar to yours and see for what prices they sold (not listed, but actually sold and closed).
  
  If you are not sure how to do this on your own, contact a lender like us and we will help you. Some borrowers have gone as far as to contact local real estate agents to get information on recent sales but that would be up to you as it may open you up to a lot of follow up from the agent and they may not be willing to help if they know there is no sale in the works.
  
  It may turn out that we also cannot gather any information on recent sales with the resources available to us, but if that is the case, we will be honest with you and tell you.
  
  At least at that point you will be able to make an educated decision as to whether you want to move forward and obtain an appraisal or not.
  
  You can start by visiting our calculator to see what the numbers look like at the value you this is most likely for your home but then you can always speak with a Loan Officer if you desire and have them check to see if sales are available in your area so you can make an informed decision based on the sales prices of those sales before you ever spend a dime on an appraisal.
  
  You have to remember that only an FHA approved appraiser can assign a value to your home that HUD will use for the program but if all the sales of similar homes are lower than the value you expected, the odds of getting that value are not very good.
  
  On the other hand, if the sales are at or above the value you are hoping for, you have a very good chance of getting the value you wish from your appraisal and knowing that information (if it's available) can help you make the decision to go forward or to hold off and take some of the risk out of the process.
  Reply to ARLO
Linda Thurston
November 26th, 2019

If you're credit score is fair, Is It feasible to trust a "friend" to have their mortgage broker for a refinancer . This would enable us to repay money owed him, fix the home that had been let go for over 20 years, but my husband would have to move out of the house at the age of over 80 years. This is also community property state and said home was brought with the sale of my own home.
Reply to Linda
- ARLO™
  November 27th, 2019
  
  Hello Linda,
  
  I am not sure I understand what you are saying here but if you are asking me if I would advise you to deed your property to someone else in an effort to obtain a loan, I would tell you absolutely no. In the first place, this is mortgage fraud to place your home in someone else's name just to secure a loan and in the second place, how would you be certain nothing would happen that you didn't lose your property? I would encourage you to seek the advice of an attorney before you contemplated any scheme which involved transferring title for the purposes of obtaining financing.
  Reply to ARLO
Debra
October 31st, 2019

I am 65 years old and I live in in a townhome. I have no mortgage and I pay about $123,000. I have HOA dues here I was told that I would need to get the board to approve the reverse mortgage. Is that true? Isn't better to wait till I am 75 years to get one? I am planning on to retire in 10 years.
Reply to Debra
- ARLO™
  November 4th, 2019
  
  Hello Debra,
  
  If you live in a true Townhouse and not a condominium, the project does not require HUD approval but if it is a townhouse "style" condominium project, then yes, your project would need to be approved or you would need to go through a single unit approval which is almost as thorough.
  As for which is better, now or waiting until you are 75, no one can make that decision but you. There are too many variables that go into the decision and many are personal preferences. I am not sure what you are saying because you say you have no mortgage, but you also say you are paying about $123,000. Do you mean your home is worth $123,000?
  
  There is no way to know what will or will not be available in the next 10 years. It is true that 10 years may improve the value of your property and at 10 years older you would qualify for more money at today's program parameters, but there are no guarantees that HUD will not change program parameters or that the interest rates will not rise in the future, eliminating all the gains the wait might bring.
  In short, no one knows what the future will bring so there is no possible way to say what is "better". What is better is to do what is right for you now.
  
  If you know you will want the loan at some point in the future, it may be a good idea to get the loan now while rates are low, and you are working. It is easier to qualify while you are working.
  HUD has a financial assessment requirement that borrowers must meet and part of that is a residual income requirement that is easier for most borrowers to meet while working or receiving some sort of income.
  If you will receive a pension and social security with no debt at the time, this may not even be an issue but it's something to consider. If you get the loan now, the rates are low, and you will receive the highest amount possible under the program while considering the rate in the calculation.
  Also, when you use the rates for the interest rate cap (the maximum the rate can ever reach), it will be the lowest possible maximum. Also, the line of credit program has a great feature when you do not draw from the line over the next 10 years if you don't plan to use the funds until then.
  The amount available to you grows over time on the unused portion of the line. The line growth means that you lock in the amount available now and that amount continues to grow if you do not use the line.
  In 10 years the line you have available would be much higher than what you have available to you when you closed the loan and you would receive an amortization schedule showing you what you could expect at the time you closed your loan.
  You only accrue interest on the portion of the line that you do use so it is very inexpensive to keep the line open while not using it.
  If you desire, you can even pay pack almost all the initial costs of the loan and keep a very small balance of just a few hundred dollars on the line and accrue even less interest over the next 10 years (you cannot pay the balance down to 0 or the line would be closed).
  
  Whatever you choose to do, it must be what is right or "better/best" for you. The best choice is the one that best meets your needs and so I would encourage you to talk to your family, your trusted financial advisor and proceed after you have all the information.
  Reply to ARLO
Julie riley
September 13th, 2019

No they are not
My husband has one to me it was all illegal back in 2008 i really want to take them to court and get my house back.
Reply to Julie
- ARLO™
  September 15th, 2019
  
  Hi Julie,
  This is a very difficult comment for me to address. I don't know why you feel it was illegal and what you mean by "get your house back". Did you sign a Deed so that he could do the loan without you (i.e. if you were not old enough at the time)?
  Because if he did the loan and you did not sign a Deed to release your interest in the property to allow the loan to close, you may have some recourse now if you were on title and he somehow had you removed without your knowledge.
  If you willingly signed the Deed so that he could obtain the loan, it is not illegal and it's very difficult to fault the lender or your husband 11 years later if you are having second thoughts now and have been living in the home payment free all this time.
  However, your husband can and always could sign another Deed to add you back to title after the loan closed. The loan allows the borrower(s) to add anyone they wish to title at any time as long as they are also still on title and still living in the property.
  I would recommend that you and your husband visit an estate attorney to make sure that all is done appropriately now but possibly a trust might even be in order in which you are both owners of the trust and the house is in the name of the trust. If the attorney does recommend this action, remember to have the trust approved by the lender before you change the title to be sure it meets all HUD requirements.
  But remember this, changing the title will make sure you have your ownership protected, but it does not allow you to stay in the home if something happens to your husband and he is no longer living in the property if you are not on the loan.
  You may also want to look at refinancing the loan with a new reverse mortgage in both your names now, before HUD eliminates the HECM to HECM refinance program as they are now talking about doing. If you have a loan with both your names on the new loan, you too would be covered and would be allowed to live in the home for life if something were to happen to your husband.
  Reply to ARLO
Teresa
September 8th, 2019

A loan officer told me my home is worth around $90,000 but I could only receive $24,000 on a reverse mortgage. How is that a good idea!?
Reply to Teresa
- ARLO™
  September 8th, 2019
  
  Hi Teresa,
  The proceeds available under the reverse mortgage program are affected by the age of the youngest borrower, property value, interest rates, fees and any funds required to be set aside in addition to just paying off the existing mortgages/liens (which you have indicated you do not have).
  I could only start guessing what the reasons would be why your available proceeds were so low at this point. It could be the result of a borrower being much less than 62 years of age, poor credit that required a Life Expectancy Set Aside to pay taxes and insurance (LESA), payoff of a lien that is showing or something else about which I can only guess.
  You really need to have the lender explain to you what the circumstances are that are affecting your available Principal Limit (loan amount) and they should be able to show you how the numbers work out on the Loan Comparison Page.
  Reply to ARLO
Linda
July 1st, 2019

I have had a reverse mortgage for 4 years and now want to pay on it. How do I do that?
Reply to Linda
- ARLO™
  July 2nd, 2019
  
  Hello Linda,
  
  You receive a monthly statement that gives you balance as of each month. You can pay off that balance in full or in part at any time without penalty. All you need to do is to send the servicer a letter requesting a Beneficiary's Demand for payoff.
  The Demand will give you a balance that includes all interest and any other fees required to close the loan and record final documents. If you do not use certified funds to pay the loan off, as the lender will not allow you to completely pay off the loan without holding the payoff until the funds clear and they know that funds are good so it could end up costing you more money as interest accrues.
  I would make sure that you get wire instructions and wire the funds so that there are no questions about the availability of funds when you do make the payoff but that is your call.
  Reply to ARLO

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