Reverse Mortgage Pros and Cons

Older homeowners use a reverse mortgage to tap their home’s equity without making a monthly payment. When you take out a reverse mortgage, you can access the loan proceeds via a lump sum, monthly payments, or line of credit. The loan comes due when you move out, sell your house, or pass away.

Continue reading to learn about the pros and cons of a reverse mortgage and when getting this type of loan makes the most sense.

Pros and cons of a reverse mortgage

There are three general types of reverse mortgages. Home equity conversion mortgages (HECMs) are the most popular and federally insured. But there are also single-purpose reverse mortgages, designed for a specific use, and proprietary reverse mortgages from private lenders. 

Regardless of the type, reverse mortgages have benefits and downsides to consider before committing to one.

Pros

• You can stay in your home

  Remaining in your home has many benefits, like maintaining independence and connecting to your community. Getting a reverse mortgage allows you to tap your home equity without selling and moving out.

• You can access additional cash

  A reverse mortgage can inject money into your budget via a lump sum, credit line, or periodic payments, offering a way to make ends meet in your later years.

• You won’t make monthly payments

  Reverse mortgages don’t require monthly payments. You receive the money upfront, and the loan doesn’t come due until you move, sell the home, or pass away.

• You won’t pay taxes on loan proceeds

  The funds you receive from a reverse mortgage are considered loan proceeds, which aren’t taxable like your income is.

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

  Reverse mortgages are generally non-recourse loans, so you can’t be held personally liable for them. So, you and your heirs don’t have to worry about paying more than your home’s value when your reverse mortgage comes due.

Cons

• You’ll have to pay fees

  Common fees include closing costs, origination fees, and service fees. These fees and interest charges are added to your loan balance each month and vary by lender.

• Your loan balance grows over time

  Unlike home equity, personal, and auto loans, the balance of your reverse mortgage loan increases—not decreases—over time. While there are perks to not having a monthly payment, watching that balance grow the longer you stay in your home may be unsettling.

• Your heirs may face complications

  If you die, the loan will become due. Any heirs will then have to come up with the money to pay the loan balance if they want to keep the house.

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

  As you paid your traditional mortgage, you likely enjoyed tax-deductible interest payments. However, you don’t get that ongoing perk with a reverse mortgage. You won’t see that tax break until the loan is paid back.

• You’ll have ongoing obligations

  You still have ongoing home-related expenses you need to keep up with when you have a reverse mortgage. These include property taxes, home insurance, HOA fees, and home repairs. If you can’t meet these obligations, you risk foreclosure.

Should I get a reverse mortgage?

Not all older homeowners are good candidates for a reverse mortgage. If you’re considering a reverse mortgage, ask yourself the following questions to ensure it’s the best option.

Do you mind reducing your heirs’ inheritance?

If you aren’t planning on selling your home, it will likely make up a sizable chunk of the inheritance you leave to your heirs. Remember that a reverse mortgage must be paid back after you pass away. That loan, therefore, will eat into your heirs’ inheritance. 

If you’re intent on leaving the largest possible inheritance for your heirs, there may be a better option than a reverse mortgage. But if you don’t mind leaving a smaller inheritance behind, it’s an option worth considering. 

Do you plan to stay in your house for the foreseeable future?

Generally, a reverse mortgage helps you stay in your home long-term. But if you plan to move out soon, the loan may not be worth the associated costs and fees. 

On the other hand, if you plan to stay in the home for the foreseeable future, a reverse mortgage is more likely to be financially worth it. If you don’t think you’ll be in your home long-term, consider other options.

Do you meet the qualifications to take out a reverse mortgage?

You’ll have to meet the minimum qualifications for a reverse mortgage. For example, the property must be your primary residence, have a low or paid-off mortgage, and keep up with ongoing homeownership expenses, including taxes and insurance. 

You also can’t have any outstanding federal debt. You’ll have to consider other options if you can’t meet these qualifications.

Do other family members live in the house with you?

Unless you move out or sell your house, your reverse mortgage comes due when you pass away. This can cause complications if you have family members living in your house. 

If there aren’t co-borrowers or your spouse isn’t eligible to continue living in the home, your heirs must pay off the loan to continue living in your house. If unprepared, this can cause significant financial stress. Before taking out a loan, consider what would happen to any family you live with when your reverse mortgage comes due. 

Do you need more cash to pay for everyday expenses?

A reverse mortgage provides additional cash you can add to your budget. But it’s not free money—you or your heirs will have to repay it eventually. Getting a reverse mortgage may not be worth the hassle and expense if you don’t need the money to pay for your expenses.

The following table recaps some reasons a reverse mortgage may or may not be a good idea: 

Consider a reverse mortgage if…	Don’t consider a reverse mortgage if…
✅ You don’t mind reducing your heirs’ inheritance	❌ You don’t want to reduce your heirs’ inheritance
✅ You plan to stay in your home for the foreseeable future	❌ You plan to move out of your home soon
✅ You meet the necessary qualifications	❌ You can’t meet the necessary qualifications
✅ Your family members will be able to stay in the house after you die (or they don’t mind moving out)	❌ The loan coming due would cause financial distress for family members sharing your home
✅ Your current income doesn’t cover your expenses	❌ You have plenty of income to cover your expenses

Tip

Don’t underestimate the importance of consulting a financial professional. Reverse mortgages are complex financial products that can have major consequences for you and your loved ones. It’s never a bad idea to walk through the pros and cons of a reverse mortgage with someone who deeply understands how they work.

Ask the expert

Rand Millwood

CFP®

Typically, the two biggest benefits of a reverse mortgage are 1) the ability to stay in your home for as long as you are alive and 2) the ability to create an additional income stream in retirement to supplement your other income sources. The negatives to a reverse mortgage center around some of the autonomy lost when you own your home outright and the potential headaches it may leave for your heirs when you pass.

Alternatives to a reverse mortgage

If a reverse mortgage doesn’t make sense for you, you may be better off with one of the following alternatives: 

Home equity loan

When you get a home equity loan, you receive your loan amount in a lump sum from the lender, which you repay in a series of monthly installments. You only need about 20% equity in your home to qualify for a home equity loan, which may make it a more accessible alternative to a reverse mortgage.

Home equity line of credit (HELOC)

A HELOC is similar to a home equity loan. But rather than a lump sum payment, you gain access to a credit line you can borrow against for a set period. Because you only repay what you spend, a HELOC is advantageous when you don’t know how much you’ll need to borrow. But unlike a reverse mortgage, you’ll eventually have a monthly payment.

Cash-out refinance

A cash-out refinance involves replacing your current mortgage with a larger one. You end up with extra cash because you get a new loan for more than you owe on your house. Like other home equity loans, you get the lump sum of cash upfront—but you also take on the burden of monthly payments.  

Sale lease-back

A sale lease-back allows you to sell your home, use the proceeds however you want, and live in your home as a tenant. You won’t have to pay home ownership costs and can continue living in your home. But you will have the burden of monthly rent.

Sell your home

An obvious alternative to a reverse mortgage is to sell your home and move out. The major downside is that you’ll need to find another place to live (and you’ll have to pay for it). But you’ll have the proceeds from the home’s sale to work with and won’t have a loan to repay.