A reverse mortgage allows homeowners aged 62 and older to convert home equity into cash, offering financial relief without monthly payments. However, it’s not without risks. While it provides liquidity and flexibility, potential downsides include high costs, increasing debt, foreclosure risks, and reduced inheritance for heirs.

Before committing, it’s crucial to understand the drawbacks so you can make an informed financial decision.

High Fees and Closing Costs

Reverse mortgages come with higher upfront costs than traditional loans. These include:
✔ Origination fees – Can be up to 2% of the home’s value.
✔ Mortgage insurance premiums (MIP) – 2% upfront, plus 0.5% annually.
✔ Servicing fees – Added to the loan balance over time.

These costs reduce the amount of cash you receive and make the loan more expensive overall.

Growing Loan Balance and Interest Costs

Unlike a traditional mortgage, where you pay down the principal, a reverse mortgage accrues interest each month, increasing your debt. Since no payments are required:

• Interest compounds over time, significantly growing the loan balance.
• Home equity decreases, reducing what’s left for heirs.
• The longer you stay in the home, the less equity remains when the loan is due.

Risk of Foreclosure

While reverse mortgages don’t require monthly payments, borrowers must still:
✔ Pay property taxes and homeowners insurance.
✔ Keep the home in good condition.

Failing to meet these obligations can result in default and foreclosure, forcing the homeowner to move out.

Reduced Inheritance for Heirs

A reverse mortgage is repaid when the homeowner sells, moves out permanently, or passes away. This can impact heirs in several ways:

• They must repay the loan if they want to keep the home.
• If the loan balance exceeds the home’s value, they may have to sell.
• There may be little to no home equity left for inheritance.

For those wanting to leave their home to family, this is an important consideration.

Impact on Government Benefits

While a reverse mortgage does not affect Social Security or Medicare, it can impact Medicaid or Supplemental Security Income (SSI). If funds are not spent immediately, they may count as an asset, potentially disqualifying the borrower from benefits.

Limited Loan Amounts

Reverse mortgages only allow homeowners to borrow a portion of their home’s value, based on factors like:
✔ Age of the borrower (older borrowers can access more funds).
✔ Home value and current interest rates.
✔ Equity available after paying off existing mortgages.

Because of these limitations, some homeowners may not receive enough funds to meet their needs.

Complex Loan Terms and Scams

Reverse mortgages are complicated financial products with strict rules and regulations. Some borrowers have been misled by predatory lenders, leading to bad loan terms. It’s essential to:
✔ Work with a reputable lender.
✔ Understand all fees and repayment terms.
✔ Avoid scams promising “free” money or misleading benefits.

FAQ

What happens if my loan balance exceeds my home’s value?
Reverse mortgages are non-recourse loans, meaning you or your heirs will never owe more than the home’s value. FHA insurance covers any shortfall.

Can I lose my home with a reverse mortgage?
Yes, if you fail to pay property taxes, insurance, or maintain the home, the lender can foreclose.

How does a reverse mortgage get repaid?
The loan is repaid when the homeowner sells, moves out permanently, or passes away. The home is typically sold to cover the balance.

Is a reverse mortgage a good idea?
It depends on your financial situation. If you need extra income and plan to stay in your home, it may be beneficial. However, if leaving an inheritance is a priority, other options should be explored.