5 Things To Know Before You Get a Reverse Mortgage

Reverse mortgages can be a good way for older adults to access the money tied up in their homes. A reverse mortgage is a loan for homeowners who are 62 or older and have considerable home equity. It allows these seniors to borrow money against the value of their home and receive funds as a lump sum, fixed monthly payment, or line of credit. The entire loan balance becomes due and payable when the borrower dies, moves away permanently, or sells the home.

If you think that sounds like an attractive proposition, you’re not alone. Reverse mortgages are also becoming more popular, with 59,000 issued in 2022 (the most recent statistics available). You should be aware, however, that reverse mortgages come with risks, obligations, and costs—and that sometimes these are hidden or hard to calculate before you finalize your reverse mortgage. In this article, we’ll take you through five of these issues.

Some Lenders Use High-Pressure Sales Tactics

The first thing you should know is that reverse mortgages have a reputation for attracting predatory practices and lenders. Some seniors have been targeted with high-pressure sales tactics on reverse mortgages. You should be especially skeptical if a salesperson suggests how to spend the money from your reverse mortgage, particularly if they suggest putting the money into another financial product.

However, this doesn’t mean that a reverse mortgage is always a bad idea. For many people, a reverse mortgage can be a good way of providing themselves with a regular, dependable income in retirement. Just make sure you understand all of the complexities of the mortgage you take out.

Reverse Mortgage Fees Are High

The costs you will pay to take out a reverse mortgage can be very high compared with other forms of borrowing against your home equity. Borrowers must pay an origination fee, an upfront mortgage insurance premium, ongoing mortgage insurance premiums (MIPs), loan servicing fees, and interest. The federal government limits how much lenders can charge for these items, but the origination fee, in particular, can be high—it’s capped at $6,000.

These fees might not be immediately obvious to borrowers contemplating a reverse mortgage, since they are often paid from the money you borrow. This means that you won’t necessarily receive the money and then have to pay it to the lender, which can hide the fact that you are paying it. In practice, this process means that fees and interest are taken out of your home equity.

You Should Add Co-Borrowers

It’s also important to pay attention to the residency rules when you take out a reverse mortgage. A reverse mortgage must be taken out against your principal residence, which is the place where you spend the majority of the year. If you leave this residence for six or 12 consecutive months, even for medical reasons, your lender may end your reverse mortgage and demand that you sell your home to pay off your debt. Lenders also might have rules about renting out all or a portion of your home.

This can be a particular problem for married couples who live together but only one of whom has their name on the reverse mortgage documents. In this case, the spouse may be forced to sell their home to pay back this debt while they are still living in it. To avoid this outcome, you should make sure that you add your spouse as a co-borrower, or at least make sure you can prove they qualify as an eligible non-borrowing spouse.

You Have Obligations

When you are working out whether a reverse mortgage can support you in retirement, you should factor in the cost of property tax and homeowner’s insurance. Most reverse mortgage lenders require borrowers to stay up to date on both of these. That’s because your house is their collateral for the loan, and it may not sell at the fair market price if it is damaged, which means the lender won’t get their money back.

In other words, after taking out a reverse mortgage, you will have obligations to your lender. And if you don’t fulfill them, your lender may foreclose on your loan. This is a real issue with reverse mortgages. According to a 2019 Brookings Institution paper on reverse mortgages, 18% of reverse mortgages ended in foreclosure. Sometimes it's because the property taxes hadn’t been paid. but typically it was because the homeowners no longer lived in the home.

There Are Other Options

Understandably, a lot of reverse mortgage lenders won’t tell you that there are other—and potentially cheaper—ways of accessing the equity you’ve built up in your home.  

These alternatives include:

• A cash-out refinance: If you’re looking to access a large amount of home equity at once, a cash-out refinance can help with that. Doing this will mean you must make monthly payments to a lender. However, in the long term, you may preserve more of your equity compared to a reverse mortgage.
• A home equity loan or a HELOC: A home equity line of credit (HELOC) provides homeowners access to home equity. Unlike a reverse mortgage, home equity loans and HELOCs require borrowers to make payments. On the other hand, they may come with fewer fees and can be a less expensive alternative to a reverse mortgage.

The best option for you will depend on your reasons for seeking a reverse mortgage. Contacting a HUD counselor can be useful if you are still unsure what to do.

The Bottom Line

A reverse mortgage can be a good way for older adults to access the equity they have built up in their homes. However, reverse mortgages may have hidden costs and obligations. It’s important to understand these before you agree to anything.