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Pros and Cons

There are many factors to consider when figuring out if a reverse mortgage is right for you, so it is important that you understand all of the possible benefits and pitfalls. These loans are not for everyone, but in the right situation, they can provide significant financial relief.


Pros of a Reverse Mortgage

Remain In Your Home

When you look at the alternatives to a reverse mortgage, what other options keep you in your home? The vast majority of older adults surveyed mentioned that they want to remain in their home for as long as possible. Selling your home and renting is not often going to benefit one financially with rents being substantial.

No Monthly Principal or Interest Payments

Borrowing via a 30-year fixed or HELOC can be unwise when on a fixed income and committing to payments until you are in your 90’s might not be the best move.  A reverse mortgage is a safer way of accessing the equity in your home, because you only have to pay the taxes and insurance every year. There is a lower risk of foreclosure when compared to a conventional loan or HELOC.

Qualifying May Be Easier

Qualifying for a reverse mortgage may be easier than qualifying for a conventional mortgage. Conventional mortgages require you to have a certain credit score and debt to income ratios.  Reverse mortgage qualifying is based on credit history and a residual income test.The debt to income ratios needed for a reverse mortgage are significantly less stringent than your regular mortgage.

Flexible & Tax-free Proceeds

You have the option to receive your proceeds in a variety of ways that can fit most needs, whether they are in a lump sum, line of credit, monthly payments, or a combination of those options. The equity in your home is available to you tax-free, because it isn’t considered income, but instead loan proceeds. Compare that feature with potential early withdrawal penalties of your other assets or withdrawing funds from a retirement portfolio in a declining market. 


A very positive feature of all reverse mortgages is that they are non-recourse in nature. The only collateral used in the transaction is your home. Should it ever be sold for less than is owed to the lender, the FHA mortgage insurance fund will cover the loss. Should you take out a reverse mortgage, you can rest assured that your heirs will never owe more than the house is worth.

Cons of a Reverse Mortgage


If you are leaning towards taking an FHA reverse mortgage with a line of credit or monthly payments, you will have substantial closing costs. One of the major costs is the upfront FHA mortgage insurance premium. The other negative in the cost column is the compounding interest accrual.  The closing costs on the proprietary reverse mortgages are substantially lower due to lack of mortgage insurance.

Using Your Equity Too Soon
Should the equity in your home be used freely or only as a last resort? That’s a very personal question that an outsider shouldn’t attempt to answer for you. If you use it now, and for good reasons, you obviously won’t have it later in life, should you have to sell and move elsewhere.

There’s an obvious downside to taking out a reverse mortgage if you intend to leave the home free and clear to your heirs. You would be borrowing a large portion of the equity, and in some cases all of the equity, leaving your family with little in the way of inheritance. We suggest having a conversation with your loved ones to clear the air on inheritance expectations vs. current quality of life.

Interference with Benefits
Be very aware of how your Federal, State, County, and/or City benefits are calculated. Consider what will happen to them if you are to receive funds from a reverse mortgage. More importantly, speak with a professional that is intimately familiar with the laws to make sure you are making the right decision.

Mortgage Interest Deduction
You can only deduct mortgage interest in the year in which you paid it. Reverse mortgage interest is deferred, and typically only paid when the loan is paid off or refinanced. The annual mortgage interest deduction that one might desire is less likely to make sense with this product unless you decide to make monthly or annual interest payments on the loan.

Consult a Loan Officer

While we offer extensive resources to make sure you have all the information, it is always best to consult with a reverse mortgage professional before applying for the loan so that you can understand the reverse mortgage pros and cons in full.

Our loan officers should be able to advise you if the loan is not right for your situation and you can always consult with a third party financial advisor to make sure your decision is the right one.