Reverse Mortgage Pros and Cons: A Balanced View
Considering a reverse mortgage? Understand the pros and cons to make the right decision for your future. Reverse Mortgage Pros and Cons It’s important to note a reverse mortgage is still a loan, and the balance will eventually be due. Key Takeaways Reverse mortgages are specialized home equity loans for homeowners age 62 and up. A reverse mortgage gets its name because instead of the homeowner making payments to a lender, the lender makes payments to the homeowner. Homeowners who take out a reverse mortgage loan can stay in their homes and don’t have to make payments on the loan until they permanently leave the home – whether they sell it, move out or pass away. Reverse Mortgage Pros Increased Security in Retirement Reverse mortgages can trade equity for cash for homeowners who have more home equity than cash. “The most typical use is to pay off existing mortgages and other debt to alleviate the burden of having to make monthly payments on those existing loans,” says Steve Irwin, president of the National Reverse Mortgage Lenders Association. “A reverse mortgage can provide supplementary cash flows or create a standby cash reserve to potentially cover health care costs, major purchases, lifestyle enhancements, in-home care or in-home modifications so those borrowers can effectively age in place.” Maximum Flexibility for Many Needs You can choose to take your loan proceeds as a lump sum, monthly payments for a specific term, monthly payments for as long as you remain in the home or as a line of credit to protect you from financial emergencies. You can even combine these options for a truly custom loan. Stay in Your Home Your home may be the most valuable thing you own and your biggest source of wealth. But not everyone wants to sell their home and move in order to cash out. With a reverse mortgage, you can stay in your home as long as you like, and you may even be able to use reverse mortgage income to pay for in-home care instead of moving to a facility. Tax-Free Income Reverse mortgage payouts are not considered income by the IRS. So even if it feels like you’re getting income each month, you won’t be taxed on it. No Minimum Credit Score or Income Requirement Underwriting guidelines for reverse mortgages are not nearly as strict as those for traditional mortgages or home equity loans. Mainly, reverse mortgage lenders want to be sure that you’ll pay your property taxes and homeowners insurance premiums and that you won’t incur tax liens on the home. Even shaky borrowers may qualify for a reverse mortgage by allowing some of their loan proceeds to be held back and used for property-related expenses. Nonrecourse Loan Reverse borrowers can choose to receive monthly payments for life (or as long as they live in their home). And they’re not required to make payments on the mortgage balance, so it grows over time. But no matter how much they owe, borrowers cannot be required to repay more than the property is worth. Neither can their heirs. There are several ways you or your heirs can pay off a reverse mortgage balance: What this means is you won’t outlive your reverse mortgage income if you receive payments for life. Cons of Reverse Mortgages Balance Increases Over Time “The balance of a reverse mortgage increases over time as interest and fees accumulate,” says Valerie Saunders, president of the National Association of Mortgage Brokers. “This growing debt can significantly reduce the homeowner’s equity in the property in some cases. As the loan balance increases, the amount of equity left in the home decreases, potentially leaving less for heirs. Heirs may need to sell the home to repay the loan.” More Expensive Like other mortgages, reverse mortgages come with loan fees and closing costs. However, the charges for reverse mortgages are generally higher than those of traditional home loans – in part because they require mortgage insurance and because their balance grows over time. Can Impact Eligibility for Low-Income Programs Programs like Medicaid and Supplemental Security Income require your income and/or savings to be under certain thresholds. You might accidentally exceed those limits if you take your loans proceeds the wrong way and push your bank account balances too high. Foreclosure Is Possible Reverse mortgage foreclosure may be on the table. If you leave home for more than 12 months for health or lifestyle reasons, your lender may decide that you’re not using the home as a primary residence and accelerate your loan – meaning you have to pay it off and can no longer draw income from it. Your lender may also start foreclosure proceedings if you fail to pay property taxes, keep up your homeowners insurance or maintain the property in good condition. When Is a Reverse Mortgage a Good Idea? Reverse mortgages aren’t for everyone, but they can be useful in the right circumstances. A reverse mortgage might make sense if you: Before you apply for a reverse mortgage, make sure you understand the costs and have considered alternatives. A U.S. Department of Housing and Urban Development counselor can offer insight and help you make sense of a reverse mortgage’s terms. Also consider discussing your plans with any family members who may be affected by your decision. When Is a Reverse Mortgage Wrong for You? Up-front reverse mortgage costs are not small, so you want to avoid borrowing with one if it’s not a good long-term solution. A reverse mortgage might be a bad idea if: If you decide to move closer to your grandchildren, leave the country or go into assisted living, you’ll have to repay the reverse mortgage. You might be better off renting your home out while you’re gone and using the income to fund your travel or facility fees. Reverse Mortgage Alternatives If you’re not sure a reverse mortgage is right for you, consider these alternatives: If you decide to proceed with a reverse mortgage, carefully review the loan terms, including payout options and repayment rules. Plan
Home Equity: A Bird in the Hand is Better than…
A New Conversation About Home Equity Since the onset of the COVID-19 pandemic, home values in the U.S. have surged. From 2020 to 2024, rural home prices rose by 23%, outpacing the 18% rise seen in urban areas. This shift was fueled by a “race for space” as families sought out larger homes and greener surroundings. According to the Case-Shiller National Home Price Index, overall U.S. home prices have jumped approximately 47.1% since early 2020—eclipsing even the housing booms of the 1990s and the early 2000s before the Great Recession. As a result, most homeowners have accumulated significant equity. In fact, as of Q4 2024, Americans aged 62 and older collectively held nearly $13.95 trillion in home equity. Yet, for many older adults, this has led to an uncomfortable financial position: being house-rich, but cash-poor. Others may find themselves blindsided by a financial crisis in the coming years and have little recourse without tapping into their retirement portfolio, which could reduce their monthly income. In this column, we’ll explore the upside and the often-overlooked drawbacks of rapidly appreciating home values—and how these factors are shaping financial conversations with older homeowners. The Hidden Costs of Appreciation Rising home equity may seem like a blessing, but it often comes with hidden burdens. Chief among them are increased property taxes and soaring homeowners’ insurance premiums. Take California, for example. State Farm recently imposed a 17% rate hike on homeowners’ insurance, with an additional 11% increase pending. If approved, this would result in a staggering 28% increase. For seniors on a fixed income, these mounting expenses can put pressure on budgets and force difficult decisions. Some older homeowners who own their home outright now have property tax bills that exceed their previous mortgage payments. Home Equity is Just a Number until… Home equity is not a liquid asset—it’s just a number on paper unless accessed through a refinance, home sale, or reverse mortgage. Worse yet, it can shrink overnight. In March 2025, home prices across the 20 largest U.S. metro areas dipped by 0.12%, marking the first monthly decline in over two years. While minor, this drop highlights the reality that real estate markets are cyclical. Seniors counting on their equity as a safety net may find themselves in trouble if home values decline or if they can’t qualify for a loan when they finally need access to that wealth. Tapping Equity Without the Burden One potential solution for older homeowners is a Home Equity Conversion Mortgage (HECM). As reverse mortgage professionals know, a HECM converts a portion of a borrower’s home value into cash or a growing line of credit, without required monthly mortgage payments. Of course, HECMs do have significant upfront costs, including a 2% initial mortgage insurance premium (MIP) based on the home’s appraised value, capped by the FHA’s lending limit. For a home valued at $1,209,750 or more, that cost alone can exceed $24,000. Even so, a HECM can offer significant long-term value, especially through its line of credit feature, which grows each month the funds remain unused, at a rate tied to the current note rate plus 0.5% annual MIP. The Cost of Waiting: One Example Consider this scenario: a 72-year-old homeowner with a fully paid-off home that’s worth $600,000 today. If their home value dropped by 25% in five years, that home would be worth $450,000: that’s a $150,000 ‘loss’ in equity that may never be recovered in that homeowner’s lifetime. But if that same homeowner had secured a HECM when the home was worth $600,000, they might have locked in access to a $200,000 line of credit. Over time, that unused credit line would continue to grow, regardless of future home price drops. Yes, there are costs. Let’s assume the initial loan balance (UPB) was $16,500. At an average 5% interest rate, plus the 0.5% annual MIP, in five years the loan balance would grow to about $22,000 a total increase of just over $5,200. They in essence preserved access to $150,000 in equity that they otherwise may have lost while securing a line of credit that has grown to over $250,000 over five years. The HECM: Flexibility Over Fragility Being house-rich doesn’t always make one financially secure, especially for older adults facing rising costs, uncertain markets, and limited income. While reverse mortgages aren’t for everyone, tools like the HECM can offer a powerful way to preserve access to home equity without sacrificing ownership or taking on new monthly mortgage payments. In the end, the real question isn’t whether a home is valuable, but whether its value can be used when it matters most. By: Shannon Hicks