Who Should Consider a Reverse Mortgage: Pros and Cons

On April 12, 2022, the U.S. Bureau of Labor Statistics reported that consumer prices had risen 8.5% between March 2021 and March 2022. Rising costs have made it more difficult for seniors to pay for food, housing, medical care and other necessities, forcing them to make tough decisions about their finances.

The cost of senior care has also risen, making it harder for seniors to get help with meal preparation, housekeeping, transportation and home health services. One potential solution is a reverse mortgage, which allows homeowners to convert the equity in their homes to cash that can be used to supplement their retirement benefits, leaving more money available to pay monthly expenses.

This article offers an in-depth look at the potential benefits and drawbacks of a reverse mortgage, explains who should consider a reverse mortgage and answers some of the most common questions about this borrowing option.

Overview of the Pros and Cons of Reverse Mortgages

For seniors who need cash to make home repairs, cover living expenses or pay unexpected medical bills, a reverse mortgage has several benefits. Before you agree to a reverse mortgage, however, it’s important to understand the potential drawbacks. The table below summarizes the pros and cons.

Benefits of Reverse Mortgages

Source of Cash

The main reason to take out a reverse mortgage is to access cash that can be used to pay for living expenses. Once the mortgage is finalized, a borrower can use the money to cover heating and cooling bills, hire someone to help around the house, pay off unsecured debts or buy whatever they need to stay healthy and comfortable. Because the total received is based on the amount of equity in the home, a reverse mortgage can also provide much more cash than a traditional personal loan.

Pay off an Existing Mortgage

For seniors struggling to make their monthly mortgage payments, one of the most attractive features of a reverse mortgage is the ability to use the proceeds to pay off the original loan on a home. In fact, reverse mortgage companies require borrowers to use their loan proceeds to pay off any existing mortgage balances.

Even though paying off a current loan reduces the net amount of cash received by the borrower, it eliminates a monthly mortgage payment, freeing up hundreds or even thousands of dollars per month that can be used for other expenses.

Ability To Stay in Your Home

It’s heartbreaking when an individual works hard to buy a home, spends decades taking care of it and ends up having to sell it due to rising costs. Reverse mortgages allow seniors to stay in their homes, giving them the comfort of a familiar environment and the ability to maintain strong community connections.

No Income Tax on Proceeds

According to the Internal Revenue Service, the cash a senior gets from a reverse mortgage isn’t classified as income. Therefore, there’s no income tax due on the loan proceeds, leaving borrowers with more cash in their pockets.

Works Well in Favorable Market Conditions

A reverse mortgage typically remains in effect for as long as the borrower stays in their home. When the borrower passes away or moves to a nursing home or assisted living facility, the balance of the mortgage becomes due. If the borrower’s spouse or children want to stay in the home, they’ll need to pay off the balance.

Heirs who can’t afford to pay off the reverse mortgage will have to sell the home and cover any difference between the sale price and the balance of the loan. If the home sells for $300,000 and the balance of the reverse mortgage is $315,000, for example, the heirs will need to pay the $15,000 difference. When market conditions are favorable, a home may sell for much more than the balance of the mortgage, leaving heirs with no additional financial obligations.

Downsides of Reverse Mortgages

Risk of Foreclosure

Taking out a reverse mortgage doesn’t eliminate the risk of foreclosure. In fact, a borrower may lose their home for any of the following reasons:

• Failure to make necessary repairs or maintain the home
• Absence from the home for most of the year
• Delinquency on property taxes
• Failure to pay homeowners insurance or homeowners association fees
• Death of the borrower if the spouse isn’t listed on the reverse mortgage

Fees and Recurring Costs

It costs money to take out a reverse mortgage. Borrowers interested in a home equity conversion mortgage backed by the U.S. Department of Housing and Urban Development may have to pay a fee to complete reverse mortgage counseling. Reverse mortgages also come with several upfront costs, including loan origination fees, mortgage insurance premiums and closing costs. Origination fees may be as high as $6,000, so cash-strapped borrowers may find it difficult to complete the application process.

Reduced Inheritance for Family Members

In most cases, the balance of the reverse mortgage must be paid off when the borrower dies, reducing the amount of money left over for their heirs. If the estate doesn’t have enough cash to pay the balance of the loan, the heirs may even have to sell the home, leaving them scrambling to find another place to live. 

Impact on Public Benefits Eligibility

Although the proceeds of a reverse mortgage don’t count as taxable income, they may be counted as personal property when government agencies are determining a senior’s eligibility for Medicaid and other need-based programs. Depending on the program’s requirements, the existence of a reverse mortgage may make a senior ineligible for aid, making it more difficult to afford medical care, food and other necessities.

Complex Financial Product

Reverse mortgages aren’t without risk, and there are many terms a borrower should learn to determine if this complex financial product makes sense based on their financial goals.

Who Should Consider a Reverse Mortgage?

You may want to consider a reverse mortgage if your home’s value has increased substantially since you purchased it. A significant boost in value can increase the amount of equity that can be converted to cash, giving borrowers access to additional funds. Reverse mortgages may also be appropriate for seniors who have enough money to continue paying property taxes and other expenses related to homeownership.

A reverse mortgage may not be the right choice for a senior with serious health issues that may force them to move into a nursing home or assisted living community within a short amount of time, as reverse mortgages must typically be repaid as soon as the borrower moves out of the home. Seniors with limited home equity should also consider other options.

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