Reverse mortgage pros and cons

The main reverse mortgage pros and cons center on one trade. You receive money with no monthly loan payment. For a $450,000 home, upfront costs are about $18,500, and the balance grows each month.

Whether the trade is worth it depends on your length of stay, your reason for needing the money and who will rely on the home afterward.

The pros of a reverse mortgage

• No monthly loan payment is required. The balance increases to cover interest and mortgage insurance. You may make payments, but they are optional.
• You continue living in your home. Your name remains on the title while you live there and follow the terms.
• The loan can pay off your mortgage. The most common reason people choose a HECM is to clear a monthly payment.
• Your credit line grows over time. The unused portion grows at the loan rate plus 0.5% a year. If left alone, a $155,200 line reaches $319,113 after 10 years in the default example.
• Heirs are protected if the home does not cover the balance. Their debt never exceeds what the home is worth, and keeping the home costs them at most 95% of its appraised value.
• This money is a loan rather than income. It is not taxable income, and it does not affect Social Security or Medicare.
• The rules are set at the federal level. HUD establishes the factors, fee caps and limit, leaving lenders to compete on margin and costs only.

The cons of a reverse mortgage

• Upfront costs are high. Other closing costs accompany $9,000 in mortgage insurance and a $6,000 origination fee on a $450,000 home. Because your loan covers these costs, you also pay interest on them.
• The balance increases over time. Monthly interest is added, along with mortgage insurance of 0.5% a year. After many years, the debt may exceed the home's value.
• The amount left for heirs is smaller. Any amount used by the loan reduces the equity your family would inherit.
• You remain responsible for the home. Property taxes, insurance and repairs are still your responsibility. Property tax or insurance payments were once missed by about 10% of HECM borrowers, according to the Congressional Research Service. That group held about 54,000 loans. Such failures can lead to foreclosure.
• You are tied to the home. Moving out causes the loan to come due. Health-related absences longer than 12 months have the same result.
• Ending the reverse mortgage costs money. Selling or refinancing repays the full amount at once.

Reverse mortgage disadvantages for heirs

What the loan costs heirs comes from the equity it uses. The loan must be repaid when the final borrower dies. Heirs have three choices: sell and keep any money remaining after the balance, pay the balance or 95% of its value to keep the home, or hand it over. They owe no more than the home itself. Deadlines are listed in the guide for heirs. That chart shows the year the balance from the default example exceeds what the home is worth.

Is a reverse mortgage a good idea?

Some homes make this a good idea, while in others it is a poor idea. A counselor would assess the choice this way.

Often a suitable choice

• You intend to remain in the home for many years.
• Your monthly budget feels squeezed by the mortgage payment.
• You want a credit line that grows so you can use it as a reserve later.
• You can easily afford ongoing taxes, insurance and repairs.
• Passing the house to heirs is not your priority, or they approve of that plan.

Often a poor choice

• You may move or enter care within a few years.
• Paying property taxes and insurance is already difficult.
• You live with someone who is not on the loan and must stay there.
• Only a small sum is needed, and cheaper credit could cover it.
• Major repairs are needed, but you cannot afford them.

Reverse mortgage for seniors: what to ask before you decide

1. How long will I live here, really?
2. How much will each part of the loan cost me upfront?
3. If I die or move first, what happens to my spouse or partner?
4. Can I cover taxes, insurance and upkeep here for my whole life?
5. If the home is sold in 10 or 20 years, what would my heirs receive?
6. Can I meet my needs at a lower cost?

Before you apply, a HUD-approved counselor reviews these with you. The session is required.

Alternatives worth checking first

• Sale and downsizing. It releases equity without any loan.
• Property tax relief from the state. Many states lower taxes for older owners or postpone collecting them. Every state page in reverse mortgage by state identifies the program for that state.
• A reverse mortgage for one specific purpose. At low cost, some public agencies lend for one need, including repairs.

Questions people ask

1. What are the disadvantages of a reverse mortgage?

   Upfront costs are high. The balance grows each month, and less equity remains for your heirs. Taxes, insurance and upkeep remain your responsibility, and moving out makes the loan due.

2. Which option works better than a reverse mortgage?

   Selling and downsizing usually costs less for someone ready to move. A HELOC or home equity loan is cheaper to open when the need is small and income is steady.

3. What does the 95% rule mean for a reverse mortgage?

   Once the loan comes due, keeping the home costs heirs whichever amount is smaller: the balance owed or 95% of its appraised value. FHA insurance covers any amount that remains owing.

4. What drawbacks does a reverse mortgage have?

   A rising balance, along with the duties that follow. Missed tax or insurance payments can cause foreclosure and take the home from borrowers.

5. Do reverse mortgages make sense for senior citizens?

   A HECM can be a sound way for owners to use equity if they stay a long time and can cover the home's costs. It usually costs too much for short stays or tight budgets.