A Guide to Reverse Mortgages: Pros & Cons

Reverse mortgages can be a difficult real estate concept for some homeowners to wrap their heads around. This partially contributes to why many have chosen to steer clear of them, and why they have earned a negative reputation. It’s also why so many homeowners have been taken advantage of through predatory sales tactics and the confusing terms that come along with reverse mortgages. The better you understand them, however, the better your chances are of avoiding a financially harmful situation –– and the more you’ll realize the list of reverse mortgage pros and cons is fairly even-sided. 

In this deep dive, we break down everything you need to know about reverse mortgages: the pros, the cons, and the alternatives. Then, we’ll help you decide if a reverse mortgage is right for you. 

Introduction to Reverse Mortgages

On the face of it, a reverse mortgage is fairly simple: a loan option that allows homeowners aged 62 and older to convert a portion of their home equity into cash without needing to sell their homes or make additional monthly mortgage payments. The loan instead is repaid when the borrower (or surviving spouse) decides to move out, sell the home, or, in many cases, passes away. 

Reverse mortgage loans are not a new concept. The story goes that the first reverse mortgage was written over 60 years ago, in 1961. A bank employee wanted to help a family friend remain in her home following the death of her husband, thus creating the then-revolutionary new product. This financial tool began to gather steam, rising to prominence in the 1980s after receiving backing from the Federal Housing Administration (FHA).¹ Now, reverse mortgages primarily exist to help retirees and older adults with limited income use the accumulated wealth in their homes for basic monthly living expenses and health care. 

Despite the perceived intent behind reverse mortgages and their somewhat heartwarming origin story, they can be harmful to some borrowers. A portion of this harm is due to confusing or vague terms, but much of it is due to misinformation. Therefore, understanding the intricacies of a reverse mortgage is crucial to making an informed decision –– and could mean the difference between successfully capitalizing on your home equity and potentially losing your home. Before we peel back the layers, let’s delve into the reverse mortgage benefits and disadvantages.

Advantages of a Reverse Mortgage

When leveraged safely, reverse mortgages can offer some compelling advantages that make them an effective solution. 

1. Financial Flexibility

Chief of a reverse mortgage’s potential advantages is the financial flexibility it offers. When homeowners enter a reverse mortgage, they access what may be hundreds of thousands of dollars worth of home equity. This extra cash can then be applied toward day-to-day expenses, aging-in-place home modifications, and healthcare costs. Its application can also be need-dependent, providing extra breathing room wherever necessary. On a fixed or limited income, this cash can help older adults enjoy a more comfortable, stable life, supplementing retirement income or even replacing it altogether –– tax-free, we might add. Seeing as the loan term is typically not up until the home is sold or its owner passes away, many participants find the added financial flexibility today to be worthwhile.

See related: How Much Money Do You Get From a Reverse Mortgage? 

2. Stay in Your Home

Another key benefit of reverse mortgages is that they allow you to access many of the perks of selling your home without having to move out. In a traditional sale, you sell your home and receive your equity –– minus applicable fees –– in return, then make way for the new owners. Contrast this with a reverse mortgage, which sees you receive your home equity while continuing to live in the home for as long as the mortgage agreement mandates. This makes reverse mortgages an especially appealing option for older homeowners wishing to spend their golden years in the comfort, familiarity, and peace of their own homes without having to sacrifice their quality of life to do so.  

3. No Monthly Mortgage Payments

Most reverse mortgages require you to have at least 50 percent equity in your home, though many homeowners entering into a reverse mortgage likely own their homes outright.² If you still happen to have a mortgage, you can use the proceeds from a reverse mortgage to pay off your loan. If not, you can enjoy being completely mortgage-free. The lack of a hefty monthly mortgage payment can significantly reduce your overall financial burden, though you’ll remain responsible for things like required property taxes, insurance, and routine home maintenance. Still, without this bill, many older homeowners find the freedom to travel and make new memories post-retirement. 

Disadvantages of a Reverse Mortgage

Despite the many benefits that make this path worth considering, there are enough reverse mortgage cons to cause you to reconsider. 

1. Fees and Interest Rates

Reverse mortgages can be a great way to access your home equity without selling your home –– but, as you’ll soon find out, they share some of the same costs as a sale. Namely, reverse mortgages are subject to origination fees and closing costs. These costs will all be comparable to the costs associated with buying a home, which is to say substantial. Where reverse mortgage fees can sometimes far exceed traditional mortgages, however, is in mortgage insurance premiums and interest. In contrast to a regular mortgage, the amount you owe will increase over the life of a reverse mortgage. And the more you borrow, the more you’ll owe.³ This often presents a challenge to older homeowners and their heirs (but more on that later).

2. Eligibility Requirements

Not every homeowner can enter into a reverse mortgage –– to qualify, there are strict eligibility requirements. As mentioned above, reverse mortgage lenders only loan to homeowners 62 years of age or older with 50 percent or more in home equity. But for some reverse mortgages, like a Home Equity Conversion Mortgage (HECM), the requirements are even more stringent: applicants must have no federal debt, the home must be in good condition, and applicants must receive professional reverse mortgage counseling from a relevant financial advisor.⁴ While these eligibility requirements will vary across products and lenders, reverse mortgages will not be right for (or available to) every homeowner, forcing some to search elsewhere.  

3. Impact on Your Heirs and Estate

The biggest disadvantage of a reverse mortgage is that it has a multi-generational impact. The equity homeowners access through a reverse mortgage can help provide comfort, flexibility, and stability through the post-retirement years. However, because the balance of a reverse mortgage loan tends to increase over time, many homeowners find that there is little to no equity left when it comes time to sell or pass the home on to heirs. If your family is in this situation now and wondering, “How do you pay back a reverse mortgage?” you’re not alone. This can be a source of frustration and even heartbreak, making it all the more important to note this potential disadvantage and discuss the long-term implications with your family when researching reverse mortgages and their alternatives. 

Understanding Reverse Mortgage Terms and Conditions

We mentioned that misinformation and confusion are among the root causes of the unpleasant reputation reverse mortgages have earned. Therefore, it's crucial to grasp the terms and conditions thoroughly before entering into a reverse mortgage agreement to avoid any surprises. Here are some key points you may encounter in your research or in your loan application paperwork. 

• Loan Balance Growth: With a reverse mortgage, the amount you owe increases over time as interest and fees are added to the original loan balance. Understand how –– and how quickly –– your loan balance grows, as well as the factors that influence this growth.

• Interest Rates: Like traditional mortgages, reverse mortgages are offered with fixed or variable interest rates. Variable rates fluctuate with the market, meaning these rates can offer the prospect of savings in certain market conditions but may spike should rates increase. Fixed interest rates, on the other hand, remain consistent throughout the life of a loan. 

• Fees: We discussed the many fees that can accompany a reverse mortgage, including origination fees, closing costs, and mortgage insurance premiums. Beware of these fees and their impact on your loan balance, as they may diminish the overall financial benefit of a reverse mortgage. 

• Repayment Conditions: Different types of reverse mortgages have slightly different repayment terms. Understand the conditions under which your loan must be repaid, including what happens if you make late payments. This will help you pave the safest path forward while remaining aware of the potential pitfalls.  

• Home Maintenance and Taxes: Certain types of reverse mortgages, like HECMs, require that borrowers keep their homes in good condition. Failure to meet this requirement can result in the rejection of your loan application –– or, if you’re already enrolled in an HECM, default. HECMs and other types of reverse mortgages may also mandate that you consistently make on-time tax and insurance payments.⁵ Take great care to understand your ongoing responsibilities as a homeowner. 

• Financial Assessment: While there are not generally any credit score requirements for a reverse mortgage, lenders will conduct a thorough financial assessment. This consists of a review of your credit history and income to ensure you can meet your financial obligations while receiving reverse mortgage payments. As with a traditional mortgage, prepare for this assessment by gathering all necessary financial records and information.  

Is a Reverse Mortgage Right for You?

There are clear benefits and limitations of reverse mortgages. But depending on your circumstances, the pros may outweigh the cons. Deciding whether a reverse mortgage is right for you will come down to several factors, including your financial situation, your age, the amount of equity in your home, and your long-term plans –– for yourself and for your heirs. In addition to consulting a financial expert for objective support with this decision, ask yourself these questions to determine if a reverse mortgage is right for you: 

• Do I have enough home equity? – This will not only impact your eligibility but help determine whether a reverse mortgage will help you accomplish your goals. 

• Do I plan to move in the (near) future? – Reverse mortgages are a long-term solution. If you’re planning to move soon, you will want to explore alternatives. 

• Do I want to leave my home or an inheritance to my family? – If you plan or hope to leave your home to an heir, accessing your home equity via a reverse mortgage may impact your estate planning. 

Depending on your answers to these questions, you may want to consider an alternative solution. Fortunately, there are many to choose from!

Alternatives to Reverse Mortgages 

Maybe you’ve found that a reverse mortgage doesn’t meet your needs, or perhaps you’ve decided it simply isn’t worth the risk. No matter the reason for pursuing other pathways, here are some alternatives to a reverse mortgage. 

• Downsizing: If your motivation for exploring a reverse mortgage hinged on having some additional cash, downsizing could be the solution you’re looking for. Selling your current home and moving to a smaller, more affordable property can help you free up some cash –– providing flexibility and comfort in your post-retirement years. Think about your current living situation and whether you need every square foot of your existing space. If not, you may want to think smaller.  

• Home Equity Loan or Line of Credit: Like a reverse mortgage, home equity loans and home equity lines of credit (HELOCs) allow you to access your home equity. Home equity loans are sometimes known as second mortgages, seeing as you take out a loan against the home equity you’ve accrued. HELOCs, on the other hand, function more like a traditional credit line or credit card, with homeowners drawing from their home equity up to a set limit. Home equity loans and HELOCs are not without their own risks and can be costly endeavors themselves, but they tend to be safer than reverse mortgages. 

• Refinancing: If you still have a mortgage, you may be able to refinance to a lower interest rate –– reducing your monthly payment and thus creating some added breathing room in your budget. It won’t allow you to immediately access your home equity. But depending on your credit report, payment history, relationship with your lender, and current market conditions, refinancing may be the best path toward long-term savings. 

• Renting Out Part of Your Home: While downsizing can be a great way to save money by moving into a smaller space, remaining in your existing space may prove to be just as profitable. By renting out a portion of your home –– whether it’s a room or a wing –– you can earn mostly passive income and create more room in your budget. There are multiple factors to consider with this approach (like whether you’d want to be a landlord, or what your taxes might look like). But if you decide you’re open to it, you might find that subletting a portion of your home is the solution you’ve been looking for.  

• State and Local Programs: If your finances feel like they’re spread a bit thin, it’s important to know that you’re not alone. On the federal level, there are programs designed to help seniors with housing costs –– including social security and supplemental security income. On the state and local level, these can include things like property tax (or “homestead”) deferrals, which can be found in Ohio and many other states.⁶ Explore programs where you live for a clearer idea of what financial support may be available. 

• Truehold’s Sell and Stay Transaction: Access your home equity? Check. Avoid the fees of a reverse mortgage? Check. Remain in your comfortable, familiar, cherished home? Check, check, check! Truehold’s sell and stay transaction has proven to be a best-of-both-worlds solution for many homeowners, making it a compelling alternative to a reverse or existing mortgage. 

Here’s how it works: You sell your home in exchange for your home equity, then continue living in your home as a renter. No interest, no age requirements, and reduced responsibilities –– we’ll handle essential repairs, property tax, and property insurance, so you can enjoy your home. You can even leverage your home equity to help finance outstanding debt, buy a new home, and more.

If you want to learn more about Truehold’s sell and stay transaction and how this can be the perfect alternative to a reverse mortgage, connect with one of our trusted representatives. You’ll get an offer on your home within 48 hours and a clearer understanding of why homeowners in so many states across the US have trusted Truehold on their journeys toward financial freedom.  

Weighing the Pros and Cons of a Reverse Mortgage

In their 60+ years, reverse mortgages have earned quite the reputation –– one that stricter government regulations have sought to, well, reverse. But reputation aside, it’s clear that reverse mortgages offer older homeowners as many perks as they do disadvantages. The balance of these pros and cons will tip in different directions depending on the homeowner. The challenge, then, becomes determining if the scales tip in your favor. 

By carefully analyzing the pros, cons, and alternatives outlined above, you give yourself the best chance at making the right choice –– for you, your future, and your family. To learn more about reverse mortgages and other methods of accessing your hard-earned home equity, contact one of our Truehold representatives. 

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Sources: 

1. Investopedia. History of Reverse Mortgages. https://www.investopedia.com/history-of-reverse-mortgages-5224844‍
2. LendingTree. How Much Equity Do You Need for a Reverse Mortgage? https://www.lendingtree.com/home/reverse-mortgage/much-equity-need-reverse-mortgage/ 
3. Consumer Financial Protection Bureau. How much will a reverse mortgage loan cost? https://www.consumerfinance.gov/ask-cfpb/what-are-the-costs-i-will-have-to-pay-for-a-reverse-mortgage-en-237/ 
4. Consumer Financial Protection Bureau. Can anyone take out a reverse mortgage loan? https://www.consumerfinance.gov/ask-cfpb/can-anyone-take-out-a-reverse-mortgage-loan-en-227/ 
5. U.S. Department of Housing and Urban Development. HOW THE HECM PROGRAM WORKS. https://www.hud.gov/program_offices/housing/sfh/hecm/hecmabou 
6. Ohio Department of Taxation. Real Property Tax – Ohio Means Testing. https://tax.ohio.gov/help-center/faqs/real-property-tax-homestead-means-testing/real-property-tax--homestead-means-testing 

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