A reverse mortgage is a loan for homeowners age 62 or older who want to borrow against their home equity without making monthly payments. This mortgage product can help older adults who have limited funds for living expenses. It can also benefit those who want to diversify their retirement income sources and protect against risks such as market downturns and outliving their savings.

Taking out a reverse mortgage also means spending a significant portion of your home equity on loan fees and interest. In addition, the loan terms can put the homeowner, spouse, and heirs at risk of losing money and a place to live.

Here are four situations in which a reverse mortgage might be a good choice and four in which it might not.

When a Reverse Mortgage Makes Sense

A reverse mortgage can be a valuable problem-solving tool for older adults who understand how these loans work and have a plan for using their equity. Here are four situations in which this loan might be a good idea.

The guidance in this article refers to home equity conversion mortgages (HECMs), which are backed by the Federal Housing Administration (FHA).

You Do Not Plan to Move Soon

If you are considering a reverse mortgage, you should plan to remain in your home for the foreseeable future. This rule of thumb is not unique to reverse mortgages; generally, taking out a new forward mortgage, such as a refinance loan, on a house you are about to sell does not make sense either. The reason is loan closing costs.

Typical Reverse Mortgage Closing Costs
Cost	Amount	Notes
Loan origination fee	Up to $6,000	Based on property value and may vary by lender34
Upfront mortgage insurance premium	Up to 3.0% of the maximum claim amount	Depends on the reverse mortgage payment plan5
Title report and insurance	$1,000	Borrowers can shop around for this service to save money
Appraisal	$500	Cost varies by location and property characteristics
HECM counseling	$125	Fee waived for borrowers who cannot afford it3
Recording fees and taxes	Varies	Assessed locally
Flood certification and monitoring	$60	Examines flood risk and determines flood insurance requirements6
Credit report	$30	Used for the borrower's financial assessment
Repairs	Varies	Required if the home does not meet FHA minimum property standards

These are the estimated fees you will pay to obtain a home equity conversion mortgage.

Paying these amounts may not make financial sense if you will move before the loan's financial benefits outweigh its costs. Moving is one of the events that makes your reverse mortgage due and payable. After paying selling fees and repaying your HECM, the proceeds from selling your house may not be enough to support your next step, whether that means downsizing, moving into assisted living, or paying a relative to care for you.

Your Spouse Is 62 or Older

Any reverse mortgage borrower must be at least 62. If you are married and your spouse is not yet 62, taking out a reverse mortgage is not ideal. Although newer laws may protect your nonborrowing spouse from losing the home if you die first, nonborrowers cannot receive money from the loan after the borrower dies. That means no more credit line withdrawals or monthly payments, and the surviving spouse could lose an important income source.

If you and your spouse are both 62 or older and both named as owners on your home's title, taking out a reverse mortgage together could be a good choice.

You Can Meet the Financial and Physical Requirements of Homeownership

Keeping up with property taxes, homeowners insurance, and home maintenance is essential if you have a reverse mortgage. If you fall behind, the lender can declare your loan due and payable.

If you do not pay your property taxes, county tax authorities can place a lien on your house, take possession of it, and sell it to recover the taxes owed. The tax authority's claim on your property takes precedence over the lender's. Therefore, if you do not pay your property taxes, you are putting the lender's collateral—your home—at risk. That is why lenders require borrowers to stay current on taxes.

Some localities offer property tax deferrals and home repair assistance programs to help homeowners age 65 or older with cash flow. Some homeowners insurance companies may also offer retirees discounts on premiums.

Failing to pay homeowners insurance premiums also puts the lender's collateral at risk. If your house burns down, there is no insurance to pay rebuilding costs. Your lender does not want to be left with a burned-out house worth far less than you owe.

Deferring home maintenance causes your house to lose value. If you do not replace a failing roof, for example, your home could suffer extensive water damage after rain or snow.

During the reverse mortgage financial assessment that is part of the HECM application process, prospective lenders will determine whether you can meet these obligations.

If you cannot, they will reduce the amount you can borrow and place that money in an escrow account so they can keep your bills current. But you will still need sufficient physical ability—or cognitive ability plus money—to keep your home in good condition.

Your Home Is Simply an Asset

Some homes have sentimental value. If your home has been in the family for decades or generations, your children may expect it to remain that way.

Although there are ways for heirs to repay a reverse mortgage and keep the home, the loan complicates matters. However, if your home is simply an asset, using it to make retirement more comfortable might be its best use.

When a Reverse Mortgage Does Not Make Sense

We have already addressed some situations in which a reverse mortgage might be the wrong choice: you are unsure how long you will continue living in the home, your spouse cannot be a co-borrower, maintaining the home will be difficult, or the house has sentimental value for your loved ones. Let us explore some additional situations in which a reverse mortgage might not fit your circumstances.

You Do Not Have Enough Equity

To qualify for a reverse mortgage, you must own your home outright or have at least approximately 50% equity. The percentage is not set by law because the exact amount of equity you need to qualify is tied to the other factors affecting how much you can borrow: your age, your desired payment plan, and interest rates.

You must have enough equity for a reverse mortgage to leave you with a reasonable lump sum, monthly payment, or line of credit after paying off your existing mortgage balance, if you still have one.

Getting quotes from at least three lenders and completing reverse mortgage counseling will tell you whether you have enough equity and how much you could borrow with each reverse mortgage payment option. If none provides the cash you need, an alternative might serve you better.

For example, selling your home would let you cash out all your equity rather than just a percentage, as with a reverse mortgage. Buying a less expensive home, renting, or moving in with a family member might be a better solution.

Someone Lives with You

If friends, relatives, or roommates live with you and are not co-borrowers on your reverse mortgage, they should be prepared to move if you die before they do. Your fellow residents may also have to leave the home if you move out for more than a year. There are exceptions for eligible nonborrowing spouses.

Moving to a nursing home or assisted living facility for more than 12 consecutive months is considered a permanent move under reverse mortgage rules. Older adults often make unplanned moves for medical reasons, and household members should be aware of this possibility.1

Reverse mortgages require borrowers to live in the home as their primary residence. In fact, borrowers must certify in writing each year that they still live in the home against which they are borrowing to avoid foreclosure.

If someone depends on you for housing and you are willing to continue that arrangement, you may want to forgo a reverse mortgage and leave them your home in your will or trust. Adding someone to your home's title will not protect them from a reverse mortgage foreclosure and may create new problems.

Your Home Has Sentimental Value

When the last reverse mortgage borrower dies, the loan becomes due and payable. Heirs who want to keep the home have the opportunity to pay the reverse mortgage balance to the lender.1 They will need cash or another mortgage to repay the loan.

If your heirs cannot or do not want to repay the loan, the lender will sell the home to recover what the borrower owes. Any positive balance between the sale proceeds and the loan balance goes to the borrower's estate. If there is a negative balance, Federal Housing Administration (FHA) insurance covers it. The heirs receive nothing, but they also owe nothing.

You Have Health Problems

Retirement-age homeowners with health problems might consider a reverse mortgage to raise money for medical bills. However, if your health worsens to the point that you must move, the loan must be repaid in full because the home no longer qualifies as your primary residence. If you may need to move because of health problems or a disability, a reverse mortgage is probably not a good idea because its upfront costs are unlikely to be worthwhile over a short period.

Homeowners who suddenly vacate or sell the property generally have only six months to repay the loan. And although borrowers can keep sale proceeds above the outstanding loan balance, thousands of dollars in reverse mortgage costs will already have been paid.

What Are the Costs of a Reverse Mortgage?

Home equity conversion mortgages (HECMs), the most common type of reverse mortgage, have a number of one-time fees and ongoing costs. The most significant are origination fees, other closing costs, and mortgage insurance premiums, along with the interest the borrower accrues on the loan balance.

Can You Walk Away from a Reverse Mortgage?

If your loan balance exceeds your home's value and you can no longer remain in the home, you have a couple of options. You can execute a deed in lieu of foreclosure or walk away and let the lender foreclose. Reverse mortgage loans are nonrecourse, and your debt cannot be passed on to your estate or heirs.1

When Do I Have to Repay a Reverse Mortgage?

Generally, reverse mortgage loans must be repaid when you move out of the home, sell it, or die. However, the lender can also require repayment if you fail to pay property taxes or property insurance, or stop maintaining the home.

Can I Change My Mind After Signing?

With most reverse mortgages, you have at least three business days after closing to cancel the deal for any reason without penalty, according to the Federal Trade Commission (FTC). To cancel, you must notify the lender in writing. Send your letter by certified mail and request a return receipt. This lets you document what the lender received and when. Keep copies of your correspondence and any enclosures. After you cancel, the lender has 20 days to return any money you paid for the financing.

Whatever your situation is now, consider how it could change in the future. Would a reverse mortgage help or hurt you in these different scenarios?

Reverse mortgages are not an ideal financial choice for everyone, and you may have other options, such as selling your home and downsizing. Older homeowners may also consider renting, which eliminates homeownership headaches such as property taxes and repairs. Other possibilities include forward mortgages, such as home equity loans, home equity lines of credit (HELOCs), or cash-out refinancing, although all require good credit and sufficient income or assets to support monthly payments.

Reverse mortgages, particularly the line-of-credit payment plan, can also be useful in many situations. They can provide emergency funds or income diversification, help pay for home care, and provide nontaxable income because the money is a loan, so they will not increase your income tax rate or Medicare premiums.

Even if a reverse mortgage is expensive and less than ideal, it may still be the best choice for your circumstances. The assumptions are that the loan proceeds will increase your long-term financial stability, you plan to remain in your home for many years, you can afford the ongoing costs of homeownership, you have a spouse age 62 or older, and you do not intend to leave your home to anyone.

Sources and References

1. Federal Trade Commission. "Reverse Mortgages."
2. U.S. Department of Housing and Urban Development. "How the HECM Program Works."
3. National Archives, Code of Federal Regulations. “206.25 Calculation of Disbursements.”
4. National Archives, Code of Federal Regulations. “206.31 Allowable Charges and Fees. ”
5. National Archives, Code of Federal Regulations. 206.105 Amount of MIP. ”
6. Free and Clear Mortgage. “Why Am I Being Charged a Flood Certification Fee When the Home I Am Getting a Mortgage for Is Not Located in a Flood Plain? ”
7. Code of Federal Regulations. 24 CFR §206.37.
8. Federal Trade Commission. "Mortgage Discrimination."
9. U.S. Department of Housing and Urban Development. "Fair Lending."
10. Consumer Financial Protection Bureau. "If I Have a Reverse Mortgage Loan, Will My Children or Heirs Be Able to Keep My Home After I Die?"
11. Consumer Financial Protection Bureau. “How Much Will a Reverse Mortgage Loan Cost? ”
12. Consumer Financial Protection Bureau. “When Do I Have to Repay a Reverse Mortgage Loan? ”