A Senior's Guide to Reverse Mortgage Risks and Drawbacks

A reverse mortgage can seem like an ideal solution for seniors looking to access their home equity without having to sell their house. While it can provide needed cash flow, it’s a complex financial product with significant risks. This guide breaks down the key drawbacks you must understand before making any decisions.

The Core Problem: Your Debt Grows, Your Equity Shrinks

Unlike a traditional mortgage where you build equity with each payment, a reverse mortgage works in the opposite direction. The lender pays you, and the loan balance increases over time. This is the most fundamental concept to grasp.

Every month, interest and fees are added to the total amount you owe. This means that over the life of the loan, the debt grows larger, and the amount of equity you (and your heirs) have in the home gets smaller. While you can’t owe more than the home’s value at the time it’s sold, this escalating balance has major implications for your financial future and what you can leave to your family.

Key Drawback 1: The Upfront Costs Can Be Very High

Getting a reverse mortgage isn’t free. The closing costs can be substantial and are often rolled into the loan balance, which means you start accruing interest on them immediately. It’s crucial to understand these fees before you sign.

  • Origination Fee: This is what the lender charges for processing your loan. For the most common type, the Home Equity Conversion Mortgage (HECM), this fee can be up to $6,000, depending on your home’s value.
  • Mortgage Insurance Premium (MIP): HECMs are insured by the Federal Housing Administration (FHA). You’ll pay an initial MIP at closing, which is 2% of your home’s appraised value. You will also pay an annual MIP, which is 0.5% of the outstanding loan balance. This insurance protects the lender, not you.
  • Third-Party Fees: These are standard closing costs similar to a regular mortgage. They include expenses for an appraisal, title search, inspections, recording fees, and other administrative services. These can easily add several thousand dollars to the total cost.
  • Servicing Fees: Some lenders charge a monthly fee to manage your account throughout the life of the loan.

These combined costs can make a reverse mortgage a very expensive way to borrow money, especially if you only plan to stay in the home for a few years.

Key Drawback 2: It Drastically Affects Your Heirs' Inheritance

Many seniors hope to pass their home on to their children. A reverse mortgage can severely complicate or even prevent this. When the last surviving borrower passes away or permanently leaves the home, the loan becomes due and payable in full.

Your heirs will face a choice:

  1. Repay the Loan: They can pay the full loan balance (including all accrued interest and fees) and keep the home. This often requires them to get their own mortgage or use other significant assets.
  2. Sell the Home: They can sell the property to pay off the loan. Any remaining money after the sale goes to them as their inheritance. If the loan balance is high, there may be very little or nothing left.
  3. Deed the Home to the Lender: If the loan balance is more than the home is worth (an “underwater” mortgage), they can give the property to the lender and walk away without owing anything further. This is a benefit of the non-recourse feature of HECMs, but it means the home is lost.

The key takeaway is that the home equity you spent a lifetime building is used to pay back the loan, not passed on to your family.

Key Drawback 3: You Can Still Lose Your Home

A common misconception is that you can’t be foreclosed on with a reverse mortgage. This is false. While you don’t make monthly mortgage payments, you are still required to meet specific obligations as the homeowner.

You must continue to pay for:

  • Property Taxes: You are responsible for all local and state property taxes.
  • Homeowners Insurance: You must maintain adequate insurance coverage on the property.
  • Home Maintenance: You must keep the property in good condition.

If you fail to meet these requirements, the lender can declare the loan in default and start foreclosure proceedings. Many seniors on a fixed income find it challenging to keep up with rising taxes and insurance premiums, putting them at risk of losing the home they intended to stay in for life.

Key Drawback 4: Strict Residency Rules Apply

A reverse mortgage requires the property to be your principal residence. If you move out for more than 12 consecutive months, the loan can become due. This is a major risk for seniors who may need to move into an assisted living facility, a nursing home, or a relative’s house for long-term care. This rule can force a difficult decision at a vulnerable time, potentially leading to the sale of the home to repay the loan.

Key Drawback 5: It May Impact Your Government Benefits

The money you receive from a reverse mortgage is generally not considered income, so it typically doesn’t affect your Social Security or Medicare benefits. However, it can impact your eligibility for means-tested programs like Medicaid or Supplemental Security Income (SSI).

These programs have strict limits on liquid assets (like cash in a bank account). If you take a lump-sum payment from your reverse mortgage and don’t spend it within the same calendar month, the remaining funds could push your assets over the eligibility threshold. This could cause you to lose crucial healthcare or income benefits.

Frequently Asked Questions

What happens if my non-borrowing spouse is still living in the home when I pass away? This used to be a major problem. Now, for HECM loans issued after August 4, 2014, an “eligible non-borrowing spouse” may be able to remain in the home after the borrower’s death, provided they meet certain criteria and continue to fulfill the loan obligations (paying taxes, insurance, etc.). However, they will not receive any further loan proceeds. It is critical to understand these specific rules.

Is counseling required to get a reverse mortgage? Yes. Before you can even apply for an FHA-insured HECM, you must complete a counseling session with an independent, government-approved counselor. The counselor’s job is to explain the costs, benefits, and risks of the loan to ensure you understand what you are signing up for.

Is a reverse mortgage the only option to access home equity? Absolutely not. Before committing to a reverse mortgage, you should explore all alternatives. These can include a Home Equity Line of Credit (HELOC), a cash-out refinance, downsizing to a smaller home, or seeking assistance from local and state programs for seniors. Each option has its own pros and cons that should be carefully weighed against your personal financial situation.