Reverse mortgages: Exploring the pros and cons for seniors

As pensions continue to be phased out in most industries, more and more retirees are relying on Social Security benefits that often do not cover all of their expenses. Unfortunately, there may be seniors who don’t realize that they have an additional asset at their disposal — their home. Some of these adults don't know that they can use their homes to fund their retirement with a reverse mortgage, as long as they’re 62 or older.

However, deciding whether a reverse mortgage is a good idea can be a complex decision — it's crucial to weigh the benefits against potential drawbacks. Read below to learn how a reverse mortgage works, when a reverse mortgage is a good idea, and if a reverse mortgage is worth it for you.

What is a reverse mortgage, and how does it work?

A reverse mortgage is a loan designed for homeowners ages 62 and older that lets you tap into your home’s equity without making monthly payments. Instead of paying the lender, the lender pays you — either as a lump sum, monthly payment, or a line of credit.

Every month, you will accrue fees and interest that will not be due until you pass away, move, or sell the house. After you no longer live in the home or pass away, the balance will be due. When that happens, the estate will be responsible for coming up with the funds to pay off the loan — usually by selling the home.

Most seniors use reverse mortgages to cover the gap between their income and their expenses. It’s one way to pay for expenses like retirement costs, healthcare, or home improvements, while still keeping the title in your name.

There are three types of reverse mortgages:

• A home equity conversion mortgage (HECM) is the most common type of reverse mortgage. The HECM is insured by the Federal Housing Administration (FHA), the same federal organization that offers FHA mortgages.
• A proprietary reverse mortgage is similar to an HECM, but is offered by a private lender and not the FHA. Proprietary reverse mortgages are often needed by homeowners with large home values. These reverse mortgages usually have higher interest rates than HECMs, but can offer more money to the homeowner than HECMs.
• A single-purpose reverse mortgage is given by a state or local organization. Like it sounds, this type of reverse mortgage can only be used for a particular reason. This may include covering necessary home repairs or paying expensive property taxes. This kind of reverse mortgage is usually less expensive, which can be a benefit for the homeowner who doesn’t need a large sum of money.

Reverse mortgage pros and cons

Here's an overview of the pros and cons of reverse mortgages:

Pros of reverse mortgages

Stay in your home

A home is the largest asset that most seniors possess. And while many are happy to sell their home and downsize, others want to grow old in the same residence they’ve had for decades. With a reverse mortgage, you can stay in your home and age in place while accessing the equity you’ve amassed over the years. This provides some comfort to seniors who aren’t ready for assisted living or nursing homes and want to stay independent.

Easier qualification

Reverse mortgages are often easier to qualify for than traditional home equity loans since repayment isn’t based on income or credit score.

Supplemental income

For seniors without a major nest egg, a reverse mortgage can help cover medical care, home repairs, or other expenses without taking on high-interest debt. The funds are typically tax-free and generally won’t impact benefits like Social Security or Medicare.

Payment deferral

Unlike traditional loans, payments for a reverse mortgage will not come due unless you pass away or move out of the home.

Protection against market declines

Most reverse mortgages are non-recourse loans, meaning the borrower or their heirs won't owe more than the home's value when the loan is repaid.

Cons

High upfront costs

While a reverse mortgage can sound like a helpful solution, there are significant upfront costs. Origination fees can run up to $6,000, and you’ll also pay closing costs similar to selling or refinancing a home, including appraisal fees, title searches, inspections, and more. can include appraisal fees, title searches, formal inspections, surveys, and more.

Interest and fees

Monthly fees add up, including interest charged by the lender and the mortgage insurance premium, which protects the loan if the home’s value declines.

Strict conditions

You’re still responsible for property taxes, homeowners insurance, and home maintenance. Failure to stay current can trigger loan default and potential foreclosure. You’re also typically required to pay off any existing mortgage when taking out a reverse mortgage, and you must live in the home as your primary residence. If you leave for an extended period, the loan may become due.

Impact on benefits

Funds from a reverse mortgage can affect eligibility for need-based government programs like Medicaid and Supplemental Security Income (SSI).

Reduces inheritance for heirs

After you pass away, the reverse mortgage is repaid from the estate. This often means your home may be sold, and because of fees and accrued interest, the remaining amount for your heirs could be less than expected.

Is a reverse mortgage a good idea?

A reverse mortgage can be a helpful tool for some seniors, but it’s not for everyone. Consider these questions before deciding:

• Do you want to stay in your home long-term and access your equity without monthly payments?
• Are you able to maintain your home, pay property taxes, and keep insurance current?
• Do you understand that the loan will need to be repaid if you move out for an extended period or pass away?
• Are you comfortable with the fact that fees, interest, and loan repayment may reduce what you leave for your heirs?
• Would a reverse mortgage help you supplement your income without affecting tax-free benefits like Social Security?

It's worth exploring other options, if:

• You plan to move soon or travel long-term.
• You're unsure if you can keep up with ongoing home expenses.
• You want to preserve more home equity for heirs.
• The disadvantages outweigh the advantages.

Thinking through these points can help you determine whether a reverse mortgage aligns with your financial goals and lifestyle.

Alternatives to a reverse mortgage

Home equity loan

A home equity loan lets you borrow a lump sum using the equity you’ve built in your home as collateral. It’s a straightforward way to access funds for big expenses like home improvements, debt repayment, or other needs.

Key features:

• Requires at least ~15% home equity
• Requires good credit and sufficient income to qualify
• Fixed interest rates and fixed monthly payments
• Loan terms typically 5to 30 years

Home equity line of credit

A home equity line of credit (HELOC) works like a credit card secured by your home’s equity, letting you borrow only what you need. It’s especially handy for projects where costs may change.

Key features:

• Requires good credit and sufficient income to qualify
• Draw period usually 5 to 10 years; make interest-only payments
• Repayment period 10 to 20 years; principal plus interest payments
• Interest may be variable, paid only on what you use

Home equity investment

A home equity investment (HEI) provides a lump sum in exchange for a share of your home’s future appreciation, without monthly payments. Instead, when you're ready to settle, you'll repay the investment plus the agreed-upon percentage of the home's change in value. It’s flexible for homeowners who want access to equity without taking on monthly debt.

Key features:

• No monthly payments; flexible 30-year repayment term
• No income or debt-to-income requirements
• Credit score requirement typically above 500
• Sufficient equity is required

The bottom line

Taking out a reverse mortgage is a major decision and should not be done lightly. Speaking with a financial planner or other qualified source can help you decide if there are any other alternatives that will be less costly and more in line with your goals.

They may also be able to help you determine the best way to access your home equity, as well as how much you actually need to live on each month. All in all, treating your home as a financial asset can help you reap the rewards of decades of growth and help you achieve your financial goals faster than you imagined.