A reverse mortgage is a great financial solution, but it’s not always the right fit. Is it right (or wrong) for you? I’ve been in the mortgage industry for over a decade and have helped hundreds of seniors get reverse mortgages. I’ll help you answer that question by breaking down the potential reverse mortgage pros and cons you should be aware of. We’ll also cover potential reverse mortgage for purchase pros and cons.
We have quite a bit of great information in this article, so we’ve included the following table of contents to make it easier to navigate. We’ve also included “Back to Top” links throughout the article to make it easier to return to the top of the page. We hope you find this information helpful!
Table of Contents
Not Always Good, Not Always Bad
As we cover potential reverse mortgage pros and cons, I want you to keep something in mind. Mainstream, highly regulated financial products (like the reverse mortgage) aren’t typically universally good or bad. In other words, they’re not always good and they’re not always bad. The “goodness” or “badness” of a reverse mortgage depends on whether it’s a good fit for you. If it’s not a good fit, then it will obviously have downsides – for you.
That doesn’t make the reverse mortgage bad, it just makes it bad for you.
This is why you should be wary of opinions from pundits, friends, and family members who say you should never, ever, ever, ever do a reverse mortgage because they’re always bad. Such people likely mean well, but it’s a good bet they don’t understand how reverse mortgages work. They won’t be a good source of advice.
On the flipside, you should also be wary of people who have absolutely nothing bad to say about reverse mortgages. Such people are probably trying to sell you something or get a piece of the action in some other way.
Again, whether a reverse mortgage is good or bad for you depends on your goals and financial situation. In my opinion, most seniors with significant home equity tend to find that the reverse mortgage positives greatly outweigh the negatives. However, we’ll cover the whole picture; we’ll cover the positives, the negatives, and a few perceived negatives that really more of a question of suitability.
If you’re interested in a reverse mortgage for purchase, we’ll throw in some possible reverse mortgage for purchase pros and cons as well.
But before we dig into the reverse mortgage pros and cons, let’s first cover what a reverse mortgage is and how it works. There is a ton of misinformation out there about reverse mortgages. As we’ll see, many of the negatives you hear about are actually based on misinformation.
What is a Reverse Mortgage?
A reverse mortgage is a unique mortgage product that gives homeowners 62 and older access to home equity without a mortgage payment.
The most popular reverse mortgage in the United States is the home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders). If somebody you know recently got a reverse mortgage, they likely got a HECM.
The HECM program was created and signed into law by President Ronald Reagan as part of the Housing and Community Development Act of 1987. The Federal Housing Administration (FHA) insures and regulates the HECM under the authority of the Department of Housing and Urban Development (HUD).
Over 50,000 seniors get HECMs every year in America today. That number will likely grow as more seniors learn about the program.
How Does It Work?
It’s essential to start with accurate information when assessing the potential reverse mortgage pros and cons. There is a huge amount of misinformation circulating about reverse mortgages, which is why so many people (unfortunately) still have a negative perception of them.
So how does a reverse mortgage really work?
First of all, a HECM is simply a home loan. It’s a unique home loan that unlocks your home equity so you can use it to enhance your retirement lifestyle and financial security.
You always remain the title owner of your home. You can leave your home to your heirs and they can either choose to keep it or sell it. If your heirs wish to keep the home, they can pay off or refinance the reverse mortgage balance. If your heirs don’t want the home and don’t want to mess with selling it, they can let the lender sell it. Once the lender sells the house, the loan balance is paid off, and any remaining equity goes into your estate.
The HECM is a non-recourse loan; the most that will have to be repaid is the value of your home. FHA will cover any shortage if your home isn’t worth enough to pay off the entire loan balance.
The HECM is highly customizable; you can tailor it to your individual financial goals and needs. You can take the proceeds as a lump sum, line of credit, term/tenure income, or a combination of these options.
You can also use a reverse mortgage to finance a home purchase with no mortgage payment.
Now that we’ve covered the basics, let’s dig into some reverse mortgage pros and cons.
Reverse Mortgage Pros and Cons
In my opinion, the main reason a reverse mortgage benefits so many seniors is because it’s so versatile. It offers several payout options and can accomplish many different things. Let’s first break down the potential positives of a reverse mortgage, then we’ll cover some of the possible negatives.
This will apply to reverse mortgages in general. We’ll cover a few pros and cons specific to purchase reverse mortgages later.
- Tap into equity without a mortgage payment. As I’ve mentioned, a HECM reverse mortgage unlocks your home’s equity without a mortgage payment. No other home loan product does that.
- Get rid of an existing mortgage payment. Remember, the HECM doesn’t require a mortgage payment as long as you live in the home and pay the required property charges. Many seniors have mortgages that will likely last longer than they will. What’s the point of paying a mortgage you may never pay off anyway? If you can get rid of a mortgage payment, you have more money to cover unexpected expenses and do fun things.
- Get rid of credit card, auto, and consumer loan payments. Many HECM borrowers use the proceeds to get rid of high interest and high payment consumer debt, which frees up cash for other things.
- Fund home improvements. A house requires periodic updating and maintenance that can get expensive. A reverse mortgage is a great way to tap into your home’s equity and reinvest it back into your home without taking on a mortgage payment. Many HECM borrowers use the proceeds to replace roofs, air conditioners, or update kitchens and bathrooms.
- Pay off medical bills. Unfortunately, Medicare doesn’t cover things like hearing aids and dental work, which can be expensive. A HECM is a great way to pay for medical expenses not covered by Medicare.
- Prepare for long-term care. I’ve worked with several seniors who set up a HECM in anticipation of long-term care expenses in the future. Long-term care can cost $5,000 to $7,000 or more per month. Experts say that the last six months of your life could be the most expensive because of long-term care. A HECM is a great way to prepare for that potential expense.
- Supplement retirement income. A HECM can provide monthly term or tenure income, which supplements your retirement income. More income means more fun, right?
- Supplement retirement assets. The HECM line of credit can supplement your existing retirement assets. Nobody knows how they’ll live and nobody wants to run out of money before they die. The HECM adds home equity to the retirement funding picture.
- Non-recourse. Most mortgage products are full recourse, which means the lender can come after you (or your estate) for the shortage if your home doesn’t sell for enough to pay off the entire loan balance. The HECM is non-recourse. You, your heirs, and your estate are not on the hook if your home isn’t worth enough to pay off the entire loan balance.
- Multiple payout options, with the line of credit being the best (in my opinion). A HECM reverse mortgage is customizable based on your financial needs and goals. As mentioned already, you can take the proceeds as a lump sum, line of credit, term/tenure income, or some combination of these options. In my opinion, the line of credit is far and away the best because it automatically grows and compounds larger over time.
Now that we’ve covered the positives, what are some potential downsides to a reverse mortgage?
Reverse Mortgage Cons
- Closing costs. Reverse mortgage closing costs can be expensive, but they’re not always expensive. The biggest closing cost is usually the initial mortgage insurance premium, or IMIP. IMIP, along with MIP, is what makes the HECM non-recourse. FHA uses IMIP premiums to cover shortages when homes don’t sell for enough to pay off entire HECM balances. You’ll likely also incur third-party costs and origination fees. Though HECM closing costs can add up, they’re usually not paid out of pocket. Most lenders will roll them into the new loan amount. The exception is HECM for purchase; closing costs are paid out of pocket in addition to your down payment for purchase HECMs.
- Interest can pile up on large loan balances. If you have a large reverse mortgage balance, the interest can pile rapidly up in the later years of the loan. Again, there are no monthly mortgage payments, so unpaid interest accrues onto the loan balance over time. Interest compounds on top of interest, which means the loan balance can increase rapidly in the later years of the loan. Don’t forget, however, that the HECM is non-recourse. Even if you somehow owe more than your home is worth, FHA will cover the shortage.
Now that we’ve covered the possible positives and negatives of reverse mortgages in general, let’s cover a few reverse mortgage for purchase-specific ones.
Reverse Mortgage for Purchase Pros and Cons
In my opinion, the purchase HECM is one of the best-kept secrets in the mortgage industry. Think about it: it’s possible to finance a home purchase without a mortgage payment. This can be a retirement game changer for the right candidate.
Of course, like anything else, there are potential upsides and downsides. Let’s cover what those are.
- Finance a home purchase without a mortgage payment. You bring the down payment and the bank finances the rest with no mortgage payments. What other loan product does that?
- Increased purchasing power. Normally, if you have only $200,000 to buy a house and want to avoid a mortgage payment, you’re limited to buying a home priced at $200,000 or less. But if you can finance roughly half the purchase price with no mortgage payment, you can now spend as much as $400,000 on a home. The purchase reverse mortgage significantly increases your purchasing power.
- Increased financial security. The purchase reverse mortgage is a fantastic financial option because it enables you to avoid a mortgage payment (which is great for monthly cash flow) without paying 100% cash. When you buy a home outright with cash, you’re investing a huge amount of liquid cash in non liquid home equity. A purchase reverse mortgage enables you to purchase a home with no mortgage payment and keep more money in the bank where it can help protect your retirement lifestyle and financial security.
- Non-recourse. Again, the HECM is non-recourse. You, your heirs, and your estate are not on the hook if your home doesn’t sell for enough to pay off the entire loan balance.
- Larger down payment than other financing options. The down payment on a purchase reverse mortgage is significantly larger than a traditional mortgage. Having said that, don’t forget that a reverse mortgage requires no monthly payment. The lender isn’t getting payments, so the loan amount will be more conservative. In other words, you’ll be limited to borrowing a smaller portion of the home’s sale price than other financing options.
- Interest can pile up on large loan balances. If you have a large reverse mortgage balance, the interest can pile rapidly up in the later years of the loan. Again, no mortgage payments are required, so unpaid interest accrues onto the loan balance over time. Interest compounds on top of interest, which means the loan balance can increase rapidly in the later years of the loan. Don’t forget, however, that the HECM is non-recourse. Even if you somehow owe more than your home is worth, FHA will cover the shortage.
Now that we’ve covered the purchase-specific pros and cons, let’s cover some perceived reverse mortgage negatives that really aren’t negatives per se. In my opinion, they’re more about suitability.
Perceived Negatives (That Are Really Just About Suitability)
Some people may consider what I’ll cover next “negatives” or “downsides”, but they’re not, in my opinion. No financial product is perfect for every situation. Again, if a a reverse mortgage is not a good fit, that doesn’t make it a bad product. It’s just not the right solution for you. Here are a few scenarios where a reverse mortgage may not make sense:
- You want the leave the most home equity possible to your heirs. The purpose of a reverse mortgage is to convert home equity into cash, which means the balance increases and your home equity decreases over time. If you wish to leave the most equity possible to your heirs, then a reverse mortgage doesn’t make sense.
- You plan to move soon. There are no prepayment penalties or limitations on selling, but a HECM is best suited for homeowners who don’t plan to move in the near future. Most HECMs have at least some closing costs, so you want to be in the loan long enough to recoup them and see some benefit. If you know you will be selling soon, it’s probably best to wait until you buy a new home to get a reverse mortgage.
- You need to borrower a small amount of cash and you plan to repay it quickly. A reverse mortgage is probably overkill if you need a small amount of money and intend to repay it quickly. A better solution might be a home equity line of credit (HELOC) or a personal loan. If you do opt for a HELOC, be sure to repay the money before the end of the draw period to avoid potential payment headaches. HELOC payments often increase substantially at the end of the draw period.
- You have a disabled relative living with you. A reverse mortgage may not be a good fit if you have a son or daughter or other relative living with you who can’t care for themselves. If something happens to you, they will lose the home if they can’t refinance or repay the reverse mortgage balance. Remember, the reverse mortgage balance becomes due and payable when you’re no longer living in the home and paying the required property charges. If you have a disabled relative living with you, you may want to consider taking out a life insurance policy to repay the HECM balance after you pass away.
- Your home is in poor condition. A HECM reverse mortgage likely isn’t workable if your home is in poor condition. FHA governs the program and has minimum qualification standards that your home must meet. If your home is in poor shape, a hard money or rehab loan might be a better solution. You will have a monthly payment, but you could refinance into a reverse mortgage later once the home repairs are complete.
Reverse Mortgage Calculators
If you’d like to estimate how much you can get from a reverse mortgage, check out our reverse mortgage calculator. We may be a little biased, but we think our calculator is the best on the web. No contact information is required!
If you’re interested in a HECM for purchase, check out our reverse mortgage for purchase calculator.
If you’d like to calculate a simple principal limit, then check out our principal limit calculator.