Reverse Mortgages - Pros and Cons

A reverse mortgage is a specialized home loan available primarily to homeowners aged 62 and older, allowing them to convert part of their home equity into cash—without selling the home or making monthly mortgage payments. Instead, the loan is repaid when the homeowner sells, moves out, or passes away.

How It Works

• The most common type is the Home Equity Conversion Mortgage (HECM), insured by the FHA.

• Homeowners receive funds as a lump sum, line of credit, monthly payments, or a combination.

• Interest and fees are added to the loan balance each month, meaning the loan balance grows over time.

• The homeowner remains responsible for property taxes, homeowner’s insurance, and maintenance.

Impacts on Homeowners

Pros

• Access to Cash: Provides supplemental income, which can be used for living expenses, medical costs, or other needs.

• No Monthly Payments: No requirement to make monthly loan payments as long as you live in the home and meet occupancy requirements.

• Stay in Your Home: You retain ownership and can remain in your home for life, provided you comply with loan terms.

• Non-Recourse Loan: You or your heirs will never owe more than the home’s value at sale, even if the loan balance exceeds it.

• Flexible Disbursement: You can choose how to receive your funds (lump sum, line of credit, monthly, or a mix).

Cons

• Reduced Equity: Your home equity decreases over time as the loan balance (principal, interest, and fees) grows.

• Potential for Foreclosure: If you fail to pay property taxes, homeowner’s insurance, or maintain the home, you could lose your property.

• Costs and Fees: Reverse mortgages come with upfront and ongoing costs like origination fees, mortgage insurance premiums, and servicing fees.

• Impact on Inheritance: Heirs may receive little or no equity if the loan balance is high; the home typically must be sold to repay the loan.

• Means-Tested Benefits: Lump sum or monthly payments may affect eligibility for Medicaid or Supplemental Security Income (SSI).

Key Considerations

• Loan Amount: Determined by your age, home value, interest rates, and loan limits.

• Repayment Triggers: The loan comes due when the last borrower dies, sells the home, or moves out for more than 12 months (such as into long-term care).

• Heirs’ Options: Heirs can repay the loan and keep the home or sell the property to settle the debt. If the home is worth less than the loan, the FHA insurance covers the shortfall.

Summary Table