Reverse Mortgage: Pros and Cons Explained

A reverse mortgage can be a powerful financial tool for homeowners aged 62 and older. But before making a decision, it’s important to understand how a reverse mortgage works, what it means for your equity, and what happens to the loan after death.

Pros of a Reverse Mortgage Loan

1. No Monthly Mortgage Payments Required
   One of the biggest advantages of a reverse mortgage is that it allows you to stay in your home without making monthly mortgage payments. Instead, the loan is repaid when you move out, sell the home, or pass away. This is a key part of understanding how a reverse mortgage loan works.

2. Access to Home Equity Without Selling
   If you're wondering how much equity is needed for a reverse mortgage, the general rule is that you need significant equity—usually at least 50% of your home’s value. The more equity you have, the more funds you can access.

3. Flexible Disbursement Options
   You can receive funds as a lump sum, monthly payments, a line of credit, or a combination. This flexibility is ideal for retirees looking to supplement income or cover unexpected expenses.

4. Tax-Free Proceeds
   The money you receive is generally not considered taxable income. However, you must still pay property taxes, insurance, and maintain the home.

5. Heirs Are Protected
   A common concern is how does a reverse mortgage work when you die. The loan becomes due, but your heirs will never owe more than the home’s value. They can choose to repay the loan and keep the home or sell the home to settle the balance.

Cons of a Reverse Mortgage

1. Loan Balance Grows Over Time
   Since no payments are made, interest accrues and the loan balance increases. This reduces the equity left in your home over time.

2. Reduced Inheritance
   Because the loan is repaid from the home’s value, there may be less left for your heirs. This is an important consideration when evaluating how a reverse annuity mortgage works.

3. Higher Upfront Costs
   Reverse mortgages often come with higher fees than traditional loans, including:

   • FHA Mortgage Insurance Premiums
   • Loan origination fees
   • Closing costs

4. Impact on Needs-Based Benefits
   While Social Security and Medicare are unaffected, Medicaid eligibility could be impacted depending on how you use the funds.

5. Homeownership Responsibilities Remain
   You must continue to live in the home, pay taxes and insurance, and maintain the property. Failing to meet these requirements could lead to foreclosure.

How Does a Reverse Mortgage Work? (Example)

Let’s say you’re 70 years old and own a $400,000 home with no mortgage. You could qualify for a reverse mortgage and access a portion of your equity—say $200,000—without selling your home. You choose to receive $1,000/month. Over time, the loan balance grows, but you continue living in your home. When you pass away, your heirs can sell the home, repay the loan, and keep any remaining equity.

This is a simplified how does a reverse mortgage work example, but it illustrates the core concept: you borrow against your home’s value, and repayment is deferred until a major life event.