Every month seemed like the same story as Susan and I reviewed her bills. No matter how much she cut back, lowering the thermostat or skipping her favorite outings, it never seemed enough. Her home, once a place of comfort and joy, was now a source of financial strain.
Every time I walked through Susan’s front door, I saw the life she had built with her late husband. To Susan, this house wasn’t a dwelling, it was where she raised her children and the last place she shared with her husband. It was her safe place; the place she wanted to call home until she passed.
But at 80 years old, with only $200,000 in retirement savings and no plans to return to work, the harsh reality that she will not have enough for retirement crept in. Her monthly Social Security check wasn’t enough to cover all her living expenses, and her savings dwindled faster than she expected. With the largest asset she had left, she turned to a reverse mortgage for financial relief.
Susan’s story isn’t unique. Many widows find themselves unprepared for the financial transition of going from a two-income household to managing everything alone. She’s part of the 37% of retirees who struggle to cover their basic expenses. And for many, a reverse mortgage may seem like the best solution.
But is it?
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What is a Reverse Mortgage?
A reverse mortgage lets homeowners turn their home equity into cash, similar to a home equity loan or HELOC, but with a twist. Instead of making monthly payments to the bank, the bank pays you until you sell the house, move out, or pass away. That said, interest and fees accumulate over time, reducing your equity in your home. Homeowners must also maintain the property and stay current on insurance and property taxes.
Typically, homeowners utilize reverse mortgages to:
- Supplement retirement income
- Pay off high-interest debt
- Pay for home repairs or improvements for aging in place
- Cover unexpected expenses
Is a Reverse Mortgage Right for You?
The short answer? It depends on your age, home equity, and financial situation. Here are the FHA requirements to qualify:
- You need to be 62 or older
- You need to own at least 50% equity in your home
- You need to have the home be your primary residence
- You need to complete a HUD-approved counseling session
- You need to be up to date on any federal debt
If you meet these criteria, a reverse mortgage could be an option, but it’s important to analyze your long-term goals. While reverse mortgages can provide financial relief, they also come with trade-offs that are not obvious at first glance.
Let’s break it down: the good, the bad, and the ugly of reverse mortgages.
The Good: Security for Cash-Strapped Retirees
For many homeowners, like Susan, a reverse mortgage can feel like a security blanket. Instead of worrying about her bills piling up without being able to afford them, Susan now has an extra source of income without having to sell the home she loves. Unlike a typical fixed mortgage loan, she doesn’t have to make monthly payments. If she stays in the home and keeps up with its expenses, Susan can continue to stay in the home for as long as she desires.
In addition, a reverse mortgage offers flexibility. Homeowners can choose to receive payments as a lump sum, a stream of income, or a line of credit. This can make a huge difference for those who want to age at home but need extra money for home modifications, medical expenses, or daily living costs.
The Bad: The Growing Debt Trap
While reverse mortgages can provide financial relief, they also come with trade-offs that aren’t obvious at first glance. That’s why, like Susan, you need to proceed with caution before committing. While she may worry less about her bills, interest on the reverse mortgage will quietly accumulate. What started as a security blanket will turn into significant debt, leaving less for her heirs or limiting her options if she ever needs to sell the house in the future.
In addition, you have to ensure you are following the reverse contract rules. Missing a property tax payment, letting the home maintenance slip, or not paying your insurance bills can risk defaulting on your reverse mortgage. For many, what seemed like a great solution for liquidity in retirement can quickly become a financial burden if they aren’t careful.
The Ugly: When Things Go Unexpectedly
While reverse mortgages can offer security, there are many scenarios in which a reverse mortgage can get ugly fast. If Susan were to move into an assisted living community, the loan would become due. Once this happens, the family would either need to repay the balance or sell the home. If the loan balance is more than the home value, the loan servicer may decide to foreclose the property.
In some cases, reverse mortgages may affect a homeowner’s ability to qualify for Medicaid benefits. If you want to receive Medicaid, it’s important to understand how the income or lump-sum payments from a reverse mortgage could impact your eligibility.
The most common issue is when retirees are misled into taking out a reverse mortgage when they don’t fully understand what they are getting into. High upfront costs and aggressive marketing by reverse mortgage companies can turn a helpful tool into a trap.
Final Thoughts About Reverse Mortgages
As I watched Susan adjust to her new finances after getting a reverse mortgage, I realized that it didn’t just help her pay the bills but also gave her more comfort. But that outcome didn’t come from immediate gratification, it was the result of asking questions, reviewing documents, and getting a second opinion.
At the end of the day, reverse mortgages aren’t good or bad, they are just tools. For some, it may unlock the ability to age at home with dignity. For others, the risks may outweigh the rewards. The key is to understand how a reverse mortgage will impact your long-term financial picture.
If you or someone you know is considering a reverse mortgage, talk with a trusted fiduciary financial advisor who can walk you through the numbers, risks, and alternative options. Your home is more than just an asset, it’s your story, safety, and legacy.
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Danielle Miura, CFP®, MSFP, EA, is the founder of Spark Financials, a life and financial planning firm specialized in helping those planning for retirement to organize, simplify, and empower them through every life turn. As a CERTIFIED FINANCIAL PLANNER™ professional, I help my clients protect their assets, manage their wealth, and dream about their future.
Thank you for sharing the pros and cons of reverse mortgage. In this current socio political climate with high interest rate, I feel it would be more of a trap than a lifeline for anyone planning to reverse mortgage their home. The markets are not very conducive for anyone planning to reverse mortgage their homes. It will only trigger anxiety for the elderly in this environment.