Advantages and Disadvantages of a Reverse Mortgage

A Guide to Reverse Mortgage Pitfalls and Benefits

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For many people, a Reverse Home Mortgage is a good way to increase their financial profile in retirement - positively affecting their quality of life. And while there are numerous benefits to the product, there are also some drawbacks.

Advantages of a Reverse Mortgage

The main advantage of Reverse Mortgages is that you can eliminate your traditional mortgage payments and/or access your home equity while still owning and living in your home. Given the right set of circumstances, a Reverse Mortgage can be an ideal way to increase your spending power in retirement.

Key advantages and benefits of Reverse Mortgages include:

  • Low Risk of Default:
    • Unlike a home equity loan, with a Reverse Home Mortgage your home can not be taken from you for reasons of non-payment – there are no payments on the loan until you permanently leave the home. However, you must continue to pay for upkeep and taxes and insurance on your home. (Furthermore, you may be subject to foreclosure if you live somewhere other than the home longer than allowed by the loan agreement.)
    • The Reverse Mortgage Lenders have no claim on your income or other assets.
  • No Downside: With a Reverse Mortgage you will never owe more than your home's value at the time the loan is repaid, even if the Reverse Mortgage lenders have paid you more money than the value of the home. This is a particularly useful advantage if you secure a Reverse Mortgage and then home price declines.
  • Tax Free: As a Reverse Mortgage is a loan, the money from it is typically tax-free, whether you receive it as fixed income or in a lump sum.
  • No Restrictions: How you use the funds from a Reverse Mortgage is up to you - go traveling, get a hearing aid, purchase long term care insurance, pay for your children’s college education, or simply leave it sitting for a rainy day - anything goes.
  • Flexible Payment Options: Depending on the type of loan you choose, you can receive the Reverse Mortgage loan money in the form of a lump sum, annuity, credit line or some combination of the above.
  • Home Ownership: With a Reverse Mortgage, you retain home ownership and the ability to live in your home. As such you are still required to keep up insurance, property taxes and maintenance for your home.
  • Guaranteed Place to Live: You can live in your home for as long as you want when you secure a Reverse Mortgage.
  • Federally Insured: The Home Equity Conversion Mortgages (HECM) is the most widely available Reverse Mortgage. It is managed by the Department of Housing and Urban Affairs and is federally insured. This is important since even if your Reverse Mortgage lender defaults, you'll still receive your payments.
  • Interest Accrues: If you take your loan amount as a Home Equity Line of Credit, then this money accrues interest. Many financial planners are recommending this strategy to clients.

Disadvantages of a Reverse Mortgage

A Reverse Mortgage may not be for everyone, consider the following:

  • Beware if You are Eligible for Low-Income Assistance: If you are currently or will be eligible to receive low-income assistance from the Federal or State government (like Medicaid), you will want to be careful that income from a Reverse Mortgage does not disqualify you from that assistance. (NOTE: Social Security and Medicare are not impacted by a Reverse Mortgage.)
  • Reconsider if You Are Planning to Move in the Near Term: Since a Reverse Home Mortgage loan is due if your home is no longer your primary residence and the up front closing costs are typically higher than other loans, it is not a good tool for those than plan to move soon to another residence.
  • Evaluate if You are Willing to Reduce Your Heirs Inheritance: Many people dismiss a Reverse Mortgage as a retirement option because they want to be sure their home goes to their heirs. And it is true, a Reverse Mortgage decreases your home equity - affecting your estate. However, you can still leave your home to your heirs and they will have the option of keeping the home and refinancing or paying off the mortgage or selling the home if the home is worth more than the amount owed on it. There are numerous potential Estate and Retirement Planning benefits to a Reverse Mortgage - see Innovative Uses of a Reverse Mortgage for more information on these options.