Reverse Mortgage: The Pros and Cons (2024)

It may not make financial sense to pay these sums if you're going to move before the loan's financial benefits outweigh the costs. Moving is one of the events that make your reverse mortgage due and payable. After paying seller fees and repaying your HECM, the proceeds from selling your house may not be enough to support your next step, whether it's downsizing, assisted living, or paying a relative for caregiving.

Your spouse is 62 or older

Any borrower on a reverse mortgage must be at least 62 years old. If you’re married and your spouse isn’t yet 62, getting a reverse mortgage is not ideal. Though new laws may protect your non-borrowing spouse from losing the home if you die first, non-borrowers can't get money from the loan after the borrower dies. That means no more credit draws or monthly payments and the surviving spouse might lose an important source of income.

If you and your spouse are each 62 or older and named as owners on your home's title, getting a reverse mortgage together might be a good choice.

You can meet the financial and physical requirements of home ownership

Keeping up with your property taxes, homeowners insurance, and home maintenance is essential if you have a reverse mortgage. If you fall behind, the lender can declare your loan due and payable.

If you don’t pay your property taxes, the county tax authorities can place a lien on your home, take possession of it, and sell it to recoup the taxes owed. The tax authority’s claim to your property supersedes the lender’s. So, if you don’t pay your property taxes, you’re putting the lender’s collateral (your house) at risk. That's why lenders require borrowers to stay current on taxes.

Not paying your homeowner's insurance premiums also puts the lender’s collateral at risk. If your house burns down, there’s no insurance to pay the costs of rebuilding. Your lender doesn’t want to get stuck with a burned-out shell of a home that isn’t worth nearly what you owe.

Deferring home maintenance causes your home to lose value. If you don’t replace a failing roof, for example, your home could end up with extensive water damage after it rains or snows.

Your home is just an asset

Some homes have sentimental value. If your home has been in the family for decades or generations, your children might hope to keep it that way.

While there are ways for heirs to pay off a reverse mortgage and keep the house, the loan does complicate things. If your home is just an asset, though, then leveraging it for a more comfortable retirement might be the best way to use it.

When a Reverse Mortgage Doesn't Make Sense

We've already touched on some scenarios when a reverse mortgage may be the wrong choice: you're not sure how long you'll keep living in the home, your spouse can't be a co-borrower, you'd struggle to maintain the home, or the home has sentimental value to your loved ones. Let's further discuss some scenarios where a reverse mortgage might not suit your circ*mstances.

You don't have enough equity

To qualify for a reverse mortgage, you must either own your home outright or have roughly 50% equity, at least. The percentage isn't set by law, because exactly how much equity you need to qualify is tied to the other factors that affect how much you can borrow: your age, the payment plan you want, and interest rates.

You need to have enough equity so that a reverse mortgage will leave you with a reasonable lump sum, monthly payment, or line of credit after paying off your existing mortgage balance (provided you still have one).

Getting quotes from at least three lenders and going through reverse mortgage counseling will tell you whether you have enough equity and how much you could borrow with each reverse mortgage payment option. If none provide the cash you need, an alternative might help you more.

For example, selling your home would allow you to cash out all of your equity, rather than just a percentage of it (as is the case with a reverse mortgage). Buying a less expensive home, renting, or moving in with a family member might be a better solution.

Someone lives with you

If you have friends, relatives, or roommates living with you and they're not co-borrowers on your reverse mortgage, they'll need to be prepared to move out if you die before them. Your co-residents may also have to vacate the home if you move out for more than a year. (There are exceptions for eligible non-borrowing spouses.) Lenders also have strict policies about renting a portion of your property to use for businesses, such as Airbnb.

Moving into a nursing home or an assisted living facility for more than 12 consecutive months is considered a permanent move under reverse mortgage regulations. Seniors often make unplanned moves for medical reasons, and household members should be aware of this possibility.

Reverse mortgages require borrowers to live in the home as their primary residence. In fact, borrowers have to certify in writing each year that they still live in the home they're borrowing against in order to avoidforeclosure.

If someone relies on you for housing (and you're okay with continuing that arrangement), you may want to forego the reverse mortgage and leave your home to them in your will or trust. Adding someone to your home's title will not protect them from reverse mortgage foreclosure (and may create new problems, too).

Your home has sentimental value

When the last reverse mortgage borrower dies, the loan becomes due and payable. Heirs who want to keep the house have the opportunity to pay the reverse mortgage balance to the lender. They'll need cash or another mortgage to pay off the loan.

If your heirs can't or won’t repay the loan, the lender will sell the home to recoup what the borrower owed. Any positive balance between the sale proceeds and the loan balance goes to the borrower's estate.If there’s a negative balance, Federal Housing Administration (FHA) insurance covers it. The heirs receive nothing, but they don't owe anything, either.

You have health challenges

Retirement-age homeowners with health issues might consider a reverse mortgage to raise cash for medical bills. However, if your health declines to the point where you must relocate, the loan must be repaid in full because the home no longer qualifies as the borrower's primary residence. If you might have to move due to health or disability, a reverse mortgage is probably unwise because, in the short run, its upfront costs are unlikely to pay off.

Homeowners who suddenly vacate or sell the property generally have just six months to repay the loan.And though borrowers may pocket any sales proceeds above the balance owed on the loan, thousands of dollars in reverse mortgage costs will have already been paid out.

The Bottom Line

No matter what your situation is now, consider how it might change in the future. Will a reverse mortgage help you or harm you under these different scenarios?

Reverse mortgages aren't an ideal financial choice for everyone and you may have other options, such as selling your home and downsizing. Older homeowners may also consider renting, which alleviates homeownership headaches like property taxes and repairs. Other possibilities include forward mortgages such as home equity loans, home equity lines of credit (HELOCs), or cash-out refinancing, though all of these require good credit and enough income or assets to support monthly payments.

Reverse mortgages, particularly the line of credit payment plan, can also be helpful in many situations. They can provide a source of emergency funds or income diversification, help pay for in-home care, and are a source of nontaxable income (because the money is a loan), so they won't increase your income tax rate or Medicare premiums.

Even if a reverse mortgage is an expensive option and not an ideal one, it may still be the best choice for your circ*mstances. Here are the ifs: If the proceeds from the loan will increase your long-term financial stability, if you plan to stay in your home for many years, if you can afford the ongoing costs of homeownership, if you have a spouse who is 62 or older and if you don’t plan to leave your home to anyone.