Welcome to our comprehensive guide on the pros and cons of reverse mortgages!  When used correctly, a reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM), can add stability to your retirement years.

However, as with any financial product, reverse mortgages are not always the best program for everyone.  This guide will help homeowners evaluate financial options, understand potential risks and benefits, and make informed decisions about reverse mortgages.

ARLO explains cons of reverse mortgages

Introduction to the Downsides

Before exploring the benefits, it’s important to understand the potential drawbacks of reverse mortgages.  Here are four key downsides to consider when deciding if a reverse mortgage is right for you.

Higher Initial Costs

  • Reverse mortgages, especially the Home Equity Conversion Mortgage (HECM), often cost more than traditional loans.
  • One major expense is the FHA mortgage insurance:
    • 2% upfront fee
    • Yearly 0.50% mortgage insurance premium (MIP)
  • This insurance protects both borrowers and lenders from default risks, ensuring that neither borrowers nor their heirs will owe more than the home’s value, no matter how the loan balance changes or if property values go down.
  • These costs can be a significant burden, especially for homeowners sensitive to closing costs.  Lender credits can sometimes help with these expenses, but they have become less common since the interest rate hikes and inflation of 2022-2023.
  • If you own a high-value property, consider a proprietary or jumbo reverse mortgage.  These don’t require government insurance, saving you the large upfront mortgage insurance costs, though they often have higher interest rates.  You could save up to $22,996.50 in upfront mortgage insurance costs by choosing a jumbo reverse mortgage.

Can Impact Eligibility for Needs-Based Assistance Programs

  • Funds from a reverse mortgage are not considered income but can affect eligibility for needs-based programs like Medicaid or Supplemental Security Income (SSI).
  • Borrowers should withdraw only what is needed and ensure the funds are used or withdrawn from their accounts before the end of the month to avoid losing eligibility.
  • A reverse mortgage does not affect regular Social Security and Medicare benefits, but strategic financial planning is essential for those relying on other government assistance programs.

Risk of Exploitation: Safeguarding Seniors in Reverse Mortgage Transactions

  • Seniors considering reverse mortgages are vulnerable to exploitation by unscrupulous individuals, including those proposing bad investments, family members with failing businesses, or deceitful caretakers.
  • The concern in the reverse mortgage process is often the potential for financial abuse and mismanagement of the funds received.
  • Seniors must seek advice from trusted, independent financial advisors to ensure that funds are used wisely and protected against exploitation.

Older Versions Lacked Spousal Protections 

  • In older reverse mortgage arrangements, there was a notable lack of protections for spouses under 62 years of age.
  • Post-2015, HUD made significant changes to safeguard “eligible non-borrowing spouses.”
  • Non-borrowing spouses must maintain the home, pay property taxes and insurance on time, and use the home as their primary residence.
  • These protections prevent immediate loan repayment upon the borrowing spouse’s death, but non-borrowing spouses cannot access any remaining funds from a line of credit associated with the reverse mortgage.
  • It’s crucial for borrowers and their spouses to understand these limitations, especially when one spouse is below the age of 62.

ARLO explains pros of reverse mortgages

Exploring the Benefits

Now that we’ve covered the potential drawbacks, let’s look at the advantages of reverse mortgages.  Here are four key benefits that can make a reverse mortgage a valuable option for your financial planning.

Eliminating Monthly Mortgage Payments

  • Reverse mortgages eliminate monthly mortgage payments for eligible borrowers.
  • Allows individuals to live in their homes for the rest of their lives without the burden of regular mortgage payments.
  • While monthly mortgage payments are eliminated, borrowers still have financial responsibilities such as maintaining the property and paying ongoing property charges like taxes and insurance.

Unrestricted Use of Tax-Free Funds

  • Reverse mortgage proceeds are tax-free, providing a financially efficient way to access home equity.
  • Borrowers can choose how to receive their funds, with options including a lump sum, a flexible line of credit, monthly payments, or a combination.
  • The flexibility and tax-free nature of these funds make reverse mortgages a powerful tool for financial planning.

Tip! It’s always advisable to consult with a tax professional to understand the specific implications for your financial situation.

Lifetime Security: The Security of a Reverse Mortgage Line of Credit

  • A reverse mortgage line of credit offers the unique benefit of lifetime security.
  • HUD guarantees that funds will always be available as long as you have remaining funds in your line of credit and adhere to your loan obligations.
  • This assurance is a significant advantage over traditional Home Equity Lines of Credit (HELOC), which banks can freeze or eliminate without prior notice.

Using a Reverse Mortgage to Buy a New Home

  • Reverse mortgages can be used to refinance an existing mortgage and purchase a new home without monthly mortgage payments.
  • This is beneficial for seniors looking at homes in 55+ communities or other desirable locations.
  • It offers improved living situations that align with changing needs and lifestyle preferences.

Evaluating Reverse Mortgages: Advantages and Disadvantages

Access to EquityAllows homeowners to access the equity in their home.May decrease the amount of home equity over time.
Repayment TermsNo monthly mortgage payments required while living in the home.Loan becomes due upon homeowner's death, moving out, or selling the home.
Income SourceCan provide a steady source of income during retirement.The loan balance, including interest and fees, accumulates over time.
Interest RatesFixed or variable rate options are available.Interest may compound over the life of the loan, increasing the total debt.
Home OwnershipBorrowers retain home ownership and can live in the home.Homeowners must maintain the home, pay property taxes, and insurance.
Impact on EstateHeirs can inherit the home and choose to pay off the reverse mortgage or sell the home.Can reduce the amount of inheritance due to the loan being repaid from estate assets.
Financial FlexibilityProvides financial flexibility in retirement with various disbursement options.May affect needs-based eligibility for certain government benefits such as SSI or Medicaid.

Frequently Asked Questions


What are the key benefits of a reverse mortgage?

  • You do not have to make any monthly mortgage payments with a reverse mortgage.
  • One of the ways to access the funds is through a line of credit that grows in availability over time.
  • A reverse mortgage loan is a non-recourse loan, meaning you will not have to pay more than the property’s value to pay the loan off, no matter how long you have the loan in place.
  • Your social security is unaffected by obtaining a reverse mortgage.

What are the drawbacks of a reverse mortgage?

  • A reverse mortgage will have higher closing costs than a traditional loan.
  • The property must be your primary residence, so you can only move out or rent the property if you pay off the loan.
  • Your heir cannot assume a reverse mortgage loan, which will become due and payable upon the passing of the last surviving borrower or when the property is no longer occupied.
  • A reverse mortgage can impact your ability to qualify for or keep certain needs-based products like Medicaid and SSI.
  • With no mortgage payments, the balance increases over time.

When is a home equity loan better than a reverse mortgage?

  • A home equity loan is better if you need short-term financing.
  • An example would be if someone wanted to borrow a small amount of money to fix up or renovate their property to sell it.
  • A reverse mortgage is unsuited for short-term financing.  It is designed to provide long-term solutions for remaining in your home.

Does the bank own the house if I get a reverse mortgage?

No.  A reverse mortgage is just a loan; therefore, you retain property ownership upon entering a reverse mortgage agreement.

Do you need a good credit score to get a reverse mortgage?

No.  A reverse mortgage loan does have credit guidelines, as all loans do, and having good credit improves your chances of getting the loan at the best terms.  However, a reverse mortgage can still be obtained even with less-than-perfect credit.  Sometimes, the guidelines permit extenuating circumstances and a Life Expectancy Set Aside to overcome derogatory credit.

Important Considerations on Reverse Mortgages

Ready to Explore if a Reverse Mortgage is Right for You?

Ready to explore if a reverse mortgage is right for you?  Use our reverse mortgage calculator to get instant quotes and see various Home Equity Conversion Mortgage (HECM) loan options tailored to your needs.