The Downside of a Reverse Mortgage

The Real Cost of a Reverse Mortgage

A reverse mortgage allows homeowners aged 62 and older to convert a portion of their home equity into cash without selling the home or making monthly mortgage payments. The downside is that the loan becomes due with interest when the borrower dies, sells the home, or moves out permanently, which can significantly reduce the inheritance left to heirs.

High Fees and Interest Rates

Reverse mortgages carry substantial upfront costs, including origination fees, closing costs, and mortgage insurance premiums. The interest rate on a reverse mortgage is typically higher than a traditional home equity loan or line of credit. Because interest accrues over time and is added to the loan balance, the debt can grow quickly, especially with a variable-rate product.

Impact on Government Benefits

Proceeds from a reverse mortgage may affect eligibility for means-tested government benefits such as Medicaid and Supplemental Security Income (SSI). The funds are generally not considered taxable income, but if they are held in a bank account, they could push a borrower over the asset limits for certain programs.

Ongoing Responsibilities

Borrowers must continue to pay property taxes, homeowners insurance, and maintain the home according to the loan terms. Failure to do so can trigger loan default and foreclosure. This requirement can be a burden for retirees on a fixed income who may struggle with ongoing homeownership costs.

Complex Repayment Terms

When the loan becomes due, the repayment amount can exceed the home's value, but federal regulations protect borrowers and non-borrowing spouses from owing more than the home is worth. However, this also means heirs may receive little or nothing from the estate, and selling the home to pay off the loan removes the possibility of passing it down.

Is a Reverse Mortgage Right for You

A reverse mortgage is not a one-size-fits-all solution. It works best for homeowners with significant equity who plan to stay in their home long-term and have no intention of leaving the property to heirs. For others, a home equity loan, downsizing, or a traditional sale may offer a better financial outcome with fewer downsides.