The 10 Main Pros and Cons of Reverse Mortgages

A reverse mortgage can help you tap into your hard-earned home equity if you’re age 62 or older. However, this type of loan has several pros and cons, and understanding them before applying is essential. On the positive side, taking out a reverse mortgage could help you age in place, access cash from your equity, and more. But fees apply, your loan balance will grow over time, and repayment could be complicated for your heirs. 

In certain cases, selling your home and downsizing, refinancing, or tapping into your home equity in another way could be a better alternative to a reverse mortgage. Here’s a deeper look at the pros and cons of reverse mortgages.

Pros

• You can stay in your home

• You can access additional cash

• No additional monthly payment

• No taxes on loan proceeds

• You (or your heirs) won’t owe more than the home is worth

Cons

• Fees

• Loan balance grows over time

• Your family may face complications

• Interest isn’t tax-deductible until you repay the loan

• Ongoing home expenses still apply

✅ 1. Pro: You can stay in your home

A reverse mortgage is generally only a wise choice if you plan to keep your home for several years. If not, an alternative form of financing, such as a flexible personal loan, could be a better choice. If you plan to stay in your home, a reverse mortgage could help you age in place and supplement a fixed income. 

Note that you’ll need to meet eligibility requirements for a reverse mortgage, such as being age 62 or older and having at least 50% equity in your home. Requirements may be stricter if you opt for a reverse mortgage from a private lender rather than a Home Equity Conversion Mortgage (HECM), which is backed by the U.S. Department of Housing and Urban Development (HUD).

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✅ 2. Pro: You can access additional cash

With a reverse mortgage, you can borrow against your home equity to cover necessary living expenses. Older adults often have a fixed income after retiring, and a reverse mortgage could supplement your retirement savings or Social Security payments in case of any surprise expenses. For instance, you might use your reverse mortgage to cover unexpected medical bills. 

Wondering how much money you can get with a reverse mortgage? That depends on your home’s value, your home equity, and your unique borrowing situation. 

✅ 3. Pro: No additional monthly payment

Unlike traditional mortgages, lenders don’t require monthly payments for a reverse mortgage. Instead, you borrow against your home equity and repay the loan balance once you—or your heirs—sell your home. This can be advantageous because you won’t need to add another monthly payment to the budget. 

Just remember: The full payment, including interest, is due once you sell your home.

✅ 4. Pro: No taxes on loan proceeds

The amount you borrow with a reverse mortgage isn’t taxable, so you don’t need to worry about getting a large tax bill when you tap into your home equity. The IRS doesn’t classify a reverse mortgage as earned income; instead, it considers the amount borrowed as loan proceeds, which are not taxable. 

✅ 5. Pro: You (or your heirs) won’t owe more than the home is worth

Before applying for a reverse mortgage, read the fine print to ensure there’s a non-recourse clause. Reverse mortgages typically include this clause, but it’s wise to check anyway. It states that you won’t owe more than your home’s market value at the time of sale and loan repayment, even if your reverse mortgage loan balance exceeds what your home is currently worth. 

❌ 6. Con: Fees 

Reverse mortgage fees will apply. You’ll generally pay an origination fee, closing costs, and possible upfront and annual mortgage insurance premiums. Origination fees can be up to $6,000, and closing costs can be anywhere from several hundred to a few thousand dollars. 

If you borrow an HECM, your upfront mortgage insurance premium will be 2% of your loan, and you’ll also pay ongoing annual premiums that amount to 0.5% of your loan balance. Depending on your lender, you might also pay monthly servicing fees for your loan. 

Consider the upfront and ongoing costs of an HECM or reverse mortgage from a private lender before applying. If you want to avoid mortgage insurance premiums or service fees, a home equity line of credit or home equity loan could be a better option than a reverse mortgage. 

❌ 7. Con: Loan balance grows over time

As with other loans or credit lines, you’ll pay interest on what you borrow with a reverse mortgage, and your outstanding loan balance will grow due to the interest accumulating on your loan. Reverse mortgage interest rates vary based on your unique situation and the type of loan you choose. 

❌ 8. Con: Your family may face complications

Typically, a reverse mortgage borrower needs to repay their loan once they sell, but repayment could also be required if you leave your home permanently. For instance, if you move into a long-term care facility or nursing home due to declining health, your lender may require you to repay your reverse mortgage if yours is the only name on the loan. 

This issue becomes a problem if you have other family members living in your home. Certain protections may help your spouse, provided that you were married when you borrowed the reverse mortgage. But they generally won’t help your children. If your lender requires reverse mortgage repayment once you’ve left your home, a non-qualifying spouse or children may be forced to sell or find the funds elsewhere to repay the balance. 

Read More

What Happens to a Reverse Mortgage When You Enter a Nursing Home?

❌ 9. Con: Interest isn’t tax-deductible until you repay the loan

Traditional mortgages include a dedicated tax deduction for mortgage interest, but this isn’t the case with a reverse mortgage. You’ll owe interest, but you can’t deduct it from your taxes until you repay the loan, typically when you decide to sell. Even then, your tax benefits may be limited. 

According to the IRS, you can only deduct interest when loan proceeds were used to “buy, build, or substantially improve the home securing the loan.” If you simply used a reverse mortgage to supplement your retirement savings and cover everyday costs, you’re not likely to benefit from a tax deduction. 

❌ 10. Con: Ongoing home expenses still apply

While you won’t have monthly payments with a reverse mortgage, you’ll need to pay homeowner association fees, property taxes, home insurance premiums, and flood insurance premiums, if applicable. These ongoing expenses still apply. 

You’ll also need to ensure that you maintain your home. Lenders typically require that you keep your property in good shape as a condition of a reverse mortgage; after all, your home is their collateral for your reverse mortgage. If you don’t and it falls into disrepair, your lender could foreclose on your home.  

If you’re hesitant about a reverse mortgage because of the downsides, it’s often smart to open a home equity line of credit (HELOC) instead—especially when you’re working and you have a high credit score. That allows you the flexibility of accessing available “equity” of the home if you need it for renovations or other reasons. 

When my clients have taxable investment assets, we can often entertain what is called a securities-backed line of credit. This is where you can “borrow” against your assets without liquidating them. This is not without risk, however, if you borrow against stocks which then decline in value

Catherine Valega, CFP®