A reverse mortgage can be a very useful financial tool for the right homeowner.
It can also be the wrong choice for someone else.
That is why I think it is important to look at the pros and cons before deciding whether a reverse mortgage makes sense.
The goal should not simply be to qualify.
The goal should be to determine whether the loan actually improves your financial situation.
What Is a Reverse Mortgage?
A reverse mortgage allows an eligible homeowner to access a portion of the equity in the home without making a required monthly principal and interest mortgage payment.
The homeowner still owns the home.
The lender does not take ownership of the property.
The borrower is still responsible for property taxes, homeowners insurance, maintenance, and the other requirements of the loan.
For a traditional FHA-insured HECM reverse mortgage, the borrower generally must be at least 62 years old.
There are also proprietary reverse mortgage programs that may be available at younger ages, depending on the lender and state.
Pros of a Reverse Mortgage
No Required Monthly Principal and Interest Mortgage Payment
This is probably the biggest reason people consider a reverse mortgage.
If you currently have a traditional mortgage, a reverse mortgage may be used to pay it off.
That can eliminate the required monthly principal and interest mortgage payment.
For someone living on Social Security, retirement income, or a fixed monthly budget, that can make a big difference.
You still need to pay:
- Property taxes
- Homeowners insurance
- HOA dues if applicable
- Flood insurance if required
- Maintenance
- Other required property charges
So the housing costs do not completely disappear.
But eliminating the principal and interest payment can improve monthly cash flow.
Access to Home Equity Without Selling the Home
Many homeowners have a large amount of money tied up in their home.
They may own a $700,000, $1 million, or even $2 million property but have very little cash available.
A reverse mortgage can allow the homeowner to access part of that equity without having to sell the home.
That can be useful if someone wants to remain in the property but needs additional financial flexibility.
You Still Own the Home
This is one of the biggest misconceptions about reverse mortgages.
The bank does not own your house.
The homeowner remains on title.
The reverse mortgage is simply a loan secured by the property.
That is similar to a traditional mortgage in that respect.
Reverse Mortgage Line of Credit
A HECM reverse mortgage may include a line-of-credit option.
Instead of taking all of the available money immediately, a homeowner may be able to leave part of the proceeds available for future use.
That can create a reserve for:
- Emergencies
- Home repairs
- Medical expenses
- Retirement expenses
- Travel
- Future care needs
- Other unexpected costs
For some homeowners, this flexibility is one of the biggest advantages of the program.
[Learn More About a Reverse Mortgage Line of Credit]
Can Help Improve Monthly Cash Flow
A reverse mortgage may help improve cash flow in more than one way.
It may:
- Eliminate an existing mortgage payment
- Provide monthly proceeds
- Create access to a line of credit
- Provide funds for large expenses
- Reduce the need to sell investments or other assets
That can be useful for someone whose income is lower in retirement than it was during their working years.
Loan Proceeds Are Generally Not Treated as Income
Reverse mortgage proceeds are generally considered loan proceeds, not earned income.
That means they are usually not treated as taxable income.
Individual tax situations can be different, so I would still recommend talking with a tax professional about your specific situation.
Can Be Used to Purchase a Home
A reverse mortgage can also be used to purchase a new primary residence.
This can be useful for someone who wants to:
- Downsize
- Move closer to family
- Relocate
- Buy a single-story home
- Move into a lower-maintenance property
- Keep more cash available after selling another home
Instead of paying the full purchase price in cash, the borrower may be able to combine their own funds with reverse mortgage financing.
[Learn More About Reverse Mortgage Purchase Loans]
There Are Non-Recourse Protections With HECM Loans
A HECM is an FHA-insured reverse mortgage.
One of the important protections is that the borrower or heirs are generally not personally responsible for paying more than the applicable value of the property under the program rules.
That can be important if the loan balance eventually grows beyond the home’s value.
Cons of a Reverse Mortgage
The Loan Balance Usually Increases Over Time
This is one of the biggest drawbacks.
With a traditional mortgage, you usually make payments and the balance goes down.
With a reverse mortgage, there is generally no required monthly principal and interest payment.
Because of that, interest and certain fees are added to the balance over time.
The amount owed usually increases.
That means the homeowner’s equity may decrease over time, depending on what happens with the property’s value.
It Reduces the Equity Available to Heirs
If leaving as much home equity as possible to children or other heirs is one of your main goals, a reverse mortgage may not be the best choice.
The loan balance increases over time.
When the loan eventually becomes due, it has to be repaid.
That means there may be less equity left in the property for heirs.
That does not mean heirs automatically lose the home.
They may have options to pay off the reverse mortgage and keep it.
But the loan needs to be taken into account when planning the estate.
[Learn More About Reverse Mortgages and Heirs]
Reverse Mortgages Have Costs
Reverse mortgages are not free.
Costs may include:
- Origination fees
- Appraisal
- Title charges
- Recording fees
- Credit-related charges
- Mortgage insurance for HECMs
- Other third-party costs
Some of these costs may be financed into the loan.
That reduces the amount of available equity.
This is one of the reasons a reverse mortgage may make less sense for someone who expects to move soon.
You Still Have to Pay Taxes and Insurance
This deserves to be repeated because it is extremely important.
A reverse mortgage does not mean you can stop paying the costs of owning the home.
The borrower is still responsible for:
- Property taxes
- Homeowners insurance
- Maintenance
- HOA dues if applicable
- Other required charges
If those obligations are not met, the loan can eventually go into default.
A reverse mortgage works best for someone who can comfortably continue paying those expenses.
The Home Must Generally Remain Your Primary Residence
For a HECM, the property needs to remain the borrower’s principal residence.
That can become an issue if someone permanently moves into assisted living, moves in with family, or spends too much time away from the property.
If the home is no longer the principal residence under the program rules, the loan may become due.
That is something to think about if there is a good chance you may need to move in the near future.
It May Not Make Sense If You Plan to Move Soon
Reverse mortgages have upfront costs.
If you expect to sell the home in a year or two, paying those costs may not make much sense.
The longer someone expects to remain in the property, the easier it may be to justify the costs.
That does not mean there is a specific number of years that automatically makes the loan good or bad.
It simply means your long-term plans matter.
Interest Is Still Being Charged
There may be no required monthly principal and interest payment, but the loan is not interest-free.
Interest is being charged on the outstanding loan balance.
That interest is typically added to the balance.
Over many years, that can become a significant amount.
This is something homeowners need to understand before closing.
A Reverse Mortgage Can Affect Future Flexibility
Using home equity today means there may be less equity available later.
That can matter if you eventually want to:
- Sell the home
- Move
- Pay for long-term care
- Help family
- Leave the property to heirs
The loan may solve one financial problem while reducing options later.
That is why I think it is important to look at the bigger picture.
Reverse Mortgage Pros & Cons at a Glance
Possible Advantages
- No required monthly principal and interest mortgage payment
- Access to home equity without selling
- You remain the owner of the home
- May provide a line of credit
- May improve monthly cash flow
- Can supplement retirement income
- Can be used to purchase another home
- HECMs include important FHA protections
Possible Disadvantages
- Loan balance usually increases over time
- Home equity may decrease
- Less equity may be left to heirs
- Closing costs can be significant
- Property taxes and insurance still have to be paid
- Home must generally remain the principal residence
- May not make sense if you plan to move soon
- Interest continues to accrue
When a Reverse Mortgage May Make Sense
A reverse mortgage may be worth looking at if you:
- Have significant equity in your home
- Want to eliminate an existing mortgage payment
- Plan to stay in the home
- Need additional monthly cash flow
- Want access to a line of credit
- Want to keep more retirement assets available
- Want to purchase another primary residence
- Can continue paying property taxes and insurance
For someone in that situation, a reverse mortgage can be a very useful tool.
When a Reverse Mortgage May Not Make Sense
It may not be the best option if you:
- Plan to move soon
- Want to preserve as much equity as possible for heirs
- Cannot comfortably pay property taxes and insurance
- Have very little equity
- Have another less expensive financing option that solves the same problem
- Do not plan to remain in the property as your primary residence
There may also be situations where selling the home, downsizing, using a HELOC, or taking another type of loan makes more sense.
I do not believe there is one answer that is right for everyone.
Reverse Mortgage vs HELOC
A HELOC may be worth comparing if the homeowner has enough income and credit to qualify and is comfortable making monthly payments.
A reverse mortgage may be more attractive for someone who wants access to equity without a required monthly principal and interest mortgage payment.
A HELOC may have lower upfront costs.
A reverse mortgage may offer more payment flexibility.
The right choice depends on:
- Credit
- Income
- Age
- Home value
- Existing mortgage
- Monthly cash flow
- Long-term plans
[Learn More About Reverse Mortgage vs HELOC]
Reverse Mortgage vs Selling the Home
Sometimes the best alternative to a reverse mortgage is selling.
If someone owns a large home they no longer need, downsizing may release more equity than a reverse mortgage ever could.
On the other hand, many homeowners do not want to move.
They may have lived in the home for 20 or 30 years.
Their family is nearby.
They know the neighborhood.
They want to stay.
In that situation, a reverse mortgage may provide another option.
There is no right answer without looking at what the homeowner actually wants.
Simple Example
Suppose a homeowner is 72 years old.
The home is worth approximately $750,000.
There is still a $125,000 mortgage with a $1,500 monthly principal and interest payment.
The homeowner wants more monthly cash flow.
A reverse mortgage may potentially pay off the existing mortgage.
That could eliminate the $1,500 required monthly principal and interest payment.
That is the advantage.
The tradeoff is that the reverse mortgage balance will increase over time, and there may be less equity available later.
Whether that tradeoff makes sense depends on the homeowner’s goals.
The Biggest Question to Ask
In my opinion, the biggest question is not:
Can I qualify for a reverse mortgage?
The better question is:
Does a reverse mortgage improve my financial situation?
Those are two very different questions.
Someone may qualify but still have a better option.
Another homeowner may find that eliminating a mortgage payment and creating access to home equity makes a major difference in retirement.
That is why I think the numbers and the homeowner’s goals need to be looked at together.
Want to See Whether a Reverse Mortgage Makes Sense for You?
If you are considering a reverse mortgage, tell me what you are trying to accomplish.
Maybe you want to eliminate your current mortgage payment.
Maybe you want a line of credit.
Maybe you need additional retirement income.
Maybe you want to buy another home.
Or maybe you are simply trying to figure out whether the advantages outweigh the disadvantages.
Start with:
- Age of the youngest borrower
- Approximate home value
- Current mortgage balance
- Property type
- State where the home is located
- What you are trying to accomplish
From there, I can help you look at the situation and determine whether a reverse mortgage may be worth exploring.
Call or text Shawn at (714) 271-8524 or email Info@TheBroker.Finance to discuss your reverse mortgage options.
[Learn How a Reverse Mortgage Works]
[Learn More About Reverse Mortgage Requirements]
[Contact Shawn]
This information is for educational purposes only and is not a commitment to lend. Reverse mortgage eligibility, proceeds, rates, costs, property requirements, and program guidelines vary based on the borrower, property, lender, and current program rules.