What are the pros and cons of a reverse mortgage? Quick cash is a serious benefit but you also have to consider the associated costs and increased administrative complexity. That said, the upfront costs of reverse mortgages are high and the loan is not tax-deductible.

Property can be a helpful asset that helps you deal with the challenges of old age. There’s a lot to consider when it comes to planning your retirement, from tax responsibilities to aging in place and leaving something for your heirs.

A reverse mortgage may seem like a great solution. It offers another source of income once you formally retire. But what about the reverse mortgage cons? What is the best strategy for you?

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What is a reverse mortgage?

A reverse mortgage allows homeowners 62 and older to transform their home equity into cash.

To be eligible for a reverse mortgage, there are a few basic qualifications:

You must own the home outright or be very close to paying it off.

You must be at least 62 years old.

You must live in the home as your primary residence for most of the year.

The most common type of reverse mortgage is HECM (home equity conversion mortgage). HECMs are backed by the FHA. You can also go to a private lender for something called a single-purpose reverse mortgage. That’s if you want to use the money for something specific like renovating or paying your property taxes.

Before taking out a reverse mortgage, you must participate in HUD-approved reverse mortgage counseling.

Once you qualify, you can choose between a lump sum, monthly payments, a line of credit, or a combination. This money is considered a loan advance, not income. For tax purposes, this can be beneficial since the funds are not taxed like 401(k) and IRA distributions.

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Cons of reverse mortgages

High up-front costs

Reverse mortgages can cost quite a bit of money, both upfront and in the long term.

Here are some of the upfront fees associated with reverse mortgages:

Origination fee from the lender (up to $6,000)

Upfront mortgage insurance (between 0.5 and 2.5% of the property’s

Closing costs: title insurance, home appraisal, and home inspection

In the long term, it’s important to understand that your interest and fees are rolled together into the monthly balance when you take out a reverse mortgage. So, your actual share of the home equity decreases as the amount you borrow grows.

The entire amount you’ve borrowed will be due when you move out.

Risk of losing the home yourself

A reverse mortgage is not a quick fix to ongoing financial instability. There are two situations in which you could take out a reverse mortgage and still lose your home.

One possible situation is foreclosure. If you do not have the funds to maintain the home properly—paying the property taxes and maintaining homeowners insurance—then your home could be foreclosed or seized while you are still living there. You and your housemates (caregivers, family) would be forced to relocate.

Your family could lose the property

Another possible situation is losing the home as a family property after you die. When you pass away, your debt from the reverse mortgage must be paid off. Typically, this is done by selling the home and applying the proceeds to the balance. The rule is that either the full loan amount or 95% of the home’s appraised value must be paid toward the debt, whichever figure is less.

If you do not plan to bequeath your home, then you don’t have to worry about this. But if you wish to pass the home on to your heirs, then keep reading.

If your property has appreciated, then there may be enough equity left over after paying the debt to leave some inheritance for your heirs. But if there has been no appreciation in the value of the property, you may not have any equity leftover for them. In a situation where your heirs want to keep the property, they must pay off the reverse mortgage or refinance.

Your heirs do have some protection after you pass. A reverse mortgage is considered “non-recourse” financing. This means that, when you die, a mortgage lender cannot make any claims against your heirs or other assets if the reverse mortgage balance exceeds the fair market value of the property.

Key Takeaway If you have not paid off the reverse mortage at the time of your death, your family could lose the property and equity.

Complex and strict payment deadlines

For the privilege of accessing cash through a reverse mortgage, you will be subject to a more complex structure of payments, deadlines, and accounting. One of the most serious reverse mortgage pitfalls is inadvertently violating asset restrictions for programs like Medicaid and SSI (Supplemental Security Income). Yikes!

With a reverse mortgage, you may receive money from the lender as monthly payments, a lump sum, a line of credit, or a combination thereof. Meanwhile, you’re still on the hook for managing:

Property taxes

Homeowners insurance premiums

HOA fees

Home maintenance costs

Some areas have property tax deferral programs to help older adults with cash flow and home repairs—but none cover homeowners insurance.

Before you take out a reverse mortgage, it’s important to honestly consider whether you will be able to handle the increase in administrative and financial responsibility.

It’s no shame to admit that cognitive ability tends to decline in older age. Think carefully about whether you have the support system in place to confidently navigate the complexity of a reverse mortgage.

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Pros of reverse mortgages

Use home equity to generate income

Many seniors experience a loss of income when they retire and leave the workforce. Access to cash can become a serious challenge, especially for people who don’t have cash savings or investments to draw upon.

Reverse mortgages can help older adults who own property to transform an illiquid asset (property) into a liquid asset (cash) to help cover expenses in old age.

If you have large medical expenses, a reverse mortgage can help cover these costs.

Stay in your home longer

If you have concerns about getting priced out of your neighborhood—but you still need cash—then a reverse mortgage could be a good solution.

Downsizing and relocating is a huge hassle that many older adults would prefer to avoid. A reverse mortgage can help you age in place, keeping the title of your property while accessing much-needed cash.

Staying for at least five more years in a neighborhood that is appreciating means 1) You get to age in place for longer, and 2) You are likely to recoup the costs of taking out the reverse mortgage.

Can help you pay off an existing home loan

A serious advantage of a reverse mortgage is that you can use the proceeds to pay off your existing home loan, freeing up your money to put toward other expenses.

Paying off the existing home loan is a smart way to use the cash from a reverse mortgage, especially if you are very close to owning the property outright.

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Alternatives to a reverse mortgage

An alternative to a reverse mortgage is simply to sell the house and cash out all the equity, rather than just a percentage. In other words, downsizing may be a faster and simpler way to access cash using your home equity.

If access to cash is the main concern, then consider a home equity loan, HELOC (home equity line of credit), or refinance with a forward mortgage.

Regardless, we recommend that you speak to a financial advisor, SSI benefits specialist, and elder law attorney before you pursue this route. A reverse mortgage can complicate your situation immensely. Get help from an expert before you make a final decision.

Finally, get quotes from multiple lenders by shopping around. Don’t accept the first rate you’re offered!

Key Takeaway If you don't want to take on the risk of a reverse mortgage, you can sell the house, take out a home equity loan, or refinance your mortgage to have cash on hand.

MORE: Should I use a HELOC to buy a car?

Finding the right home insurance

While you cannot see into the future, there’s a lot you can do to prepare for it.

Your home is an asset that shelters you. It’s very important to protect this asset with a great home insurance policy, especially if you plan to age in place or bequeath the property to heirs.

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