Reverse Mortgage Reviews: Is It A Rip Off Or A Good Idea?

Kiah Treece is a small business owner and personal finance expert with experience in loans, business and personal finance, insurance and real estate. Her focus is on demystifying debt to help individuals and business owners take control of their fina.

Kiah Treece Loans Writer

Kiah Treece is a small business owner and personal finance expert with experience in loans, business and personal finance, insurance and real estate. Her focus is on demystifying debt to help individuals and business owners take control of their fina.

Written By Kiah Treece Loans Writer

Kiah Treece is a small business owner and personal finance expert with experience in loans, business and personal finance, insurance and real estate. Her focus is on demystifying debt to help individuals and business owners take control of their fina.

Kiah Treece Loans Writer

Kiah Treece is a small business owner and personal finance expert with experience in loans, business and personal finance, insurance and real estate. Her focus is on demystifying debt to help individuals and business owners take control of their fina.

Loans Writer Chris Jennings Loans & Mortgages Editor

Chris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.

Chris Jennings Loans & Mortgages Editor

Chris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.

Chris Jennings Loans & Mortgages Editor

Chris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.

Chris Jennings Loans & Mortgages Editor

Chris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.

| Loans & Mortgages Editor

Updated: Feb 12, 2024, 12:06pm

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Reverse Mortgage Reviews: Is It A Rip Off Or A Good Idea?

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A reverse mortgage may seem enticing if you’re retired and struggling with expenses on a fixed income. However, reverse mortgages come at a cost, so it’s critical to know all the terms upfront.

Reverse mortgage lenders impose high fees and closing costs, and borrowers must pay for mortgage insurance. Reverse mortgages can also come with variable interest rates so your overall costs could increase down the road.

If you think a reverse mortgage might help you stay in your home through retirement, make sure you understand the risks and rewards so you can make a better-informed decision.

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Mutual of Omaha Mortgage

What is a Reverse Mortgage

A reverse mortgage is a secure financial tool which allows property owners 62 years and older to borrow against their home equity

Lump sum, monthly payments, a line of credit or a combination of the three

On Mutual of Omaha's Website

A reverse mortgage is a secure financial tool which allows property owners 62 years and older to borrow against their home equity

Lump sum, monthly payments, a line of credit or a combination of the three

What Is a Reverse Mortgage?

A reverse mortgage is a lending option that lets homeowners who’ve paid off all or most of their mortgage to tap into their home equity. Reverse mortgage funds, which are only available on primary residences and to people over the age of 62, are structured as lump sums or lines of credit that can be accessed on an as-needed basis.

Unlike a traditional mortgage where the balance decreases over time as you make payments, with a reverse mortgage, that balance increases as interest and fees are added on a monthly basis. The loan balance is not paid until the home is sold, either because the borrower moved or passed away.

How Do Reverse Mortgages Work?

Like the term itself, reverse mortgages work the opposite of a traditional mortgage in that payment does not typically occur until the home is sold, either because the borrower moved out or died. Because you’re not making monthly payments like a traditional mortgage, interest and fees keep accruing so the balance goes up, rather than down.

If the homeowner moves out before the loan is repaid, there is a one-year window to close out the loan. If the borrower dies, the estate (or heir to the estate) must pay back the loan, but not more than the value of the house.

Reverse mortgages often come with high fees and closing costs, and a potentially costly mortgage insurance premium. For loans equal to 60% or less of the home’s appraised value, this premium typically equals 0.5%. However, if a reverse mortgage exceeds 60% of the home’s value, the premium can increase to 2.5% of the loan amount.

Types of a Reverse Mortgage

There are several different kinds of reverse mortgages including:

Pros and Cons of a Reverse Mortgage

While a reverse mortgage may seem like a good way to access cash in your golden years, it’s important to understand the realities of this type of loan. Here’s how you can expect to benefit from a reverse mortgage—and what to look out for when comparing this loan option to other alternatives.

Pros

If you’re worried about your ability to cover living expenses or otherwise meet financial obligations, a reverse mortgage might provide the life raft you need.

Cons

For many homeowners, however, the disadvantages of a reverse mortgage outweigh the benefits. Consider these risks before taking out a reverse mortgage against your home.

How To Avoid Reverse Mortgage Scams

If you’re applying for a reverse mortgage, talk to a counselor from an independent government-approved housing counseling agency first. The counselor will explain the costs and financial implications of getting a reverse mortgage, as well as the possible alternatives. You should also ask for their help comparing the costs of different types of reverse mortgages.

When shopping for a reverse mortgage, take your time and don’t allow yourself to get pressured into buying other financial products as part of the package. This is a complicated process; if you feel pressured, then do not do it.

You should also watch out for contractors who suggest getting a reverse mortgage to cover the costs of home improvement or repairs. A home equity line of credit (HELOC) is a more suitable option for these expenses.

It’s important to note that you have three business days after a reverse mortgage closes to cancel the deal for any reason, without penalty. This is referred to as your right of rescission. Avoid reverse mortgage loans that don’t give you this option.

Is a Reverse Mortgage a Good Idea?

Whether or not you should get a reverse mortgage depends heavily on your financial situation. If you’re worried about covering living expenses, a reverse mortgage might help if you:

When Is a Reverse Mortgage a Bad Idea?

In many cases, a reverse mortgage is not the best option for senior homeowners. Here are cases when you should not use a reverse mortgage:

Alternatives to a Reverse Mortgage

If a reverse mortgage isn’t appealing but you still need access to cash, consider the alternatives to a reverse mortgage—like refinancing your mortgage or taking out a home equity loan. Evaluate these other mortgage options before saddling yourself with a reverse mortgage.

Downsize Your Home

While downsizing may not be an attractive option for everyone, selling your home and buying a smaller, less expensive one can provide extra cash to cover living expenses. If the real estate market is hot in your area, this can be a great way to get the most out of your hard-earned home equity.

However, if you’re in a seller’s market you’ll likely have to pay a premium for your new, smaller space. Even so, retaining your home equity without taking out a reverse mortgage can be a much more attractive—and less expensive—way to cover expenses in retirement.

Cash-out Mortgage Refinance

If you have equity in your home but aren’t comfortable with a reverse mortgage, mortgage refinancing is another option to borrow against that equity. This process involves taking out a new home loan to pay off your existing mortgage, while you also can access lower interest rates and more favorable lending terms.

With a cash-out refinance, you can borrow more than your mortgage’s outstanding balance and use those funds to cover home improvements or consolidate other debts. Just keep in mind that you’ll have to pay refinancing fees that typically equal between 3% and 6% of the original mortgage loan’s outstanding balance.

Home Equity Loan or Home Equity Line of Credit

A home equity loan is a second mortgage that’s secured by the borrower’s home equity and paid out in a lump sum. Similarly, a HELOC lets homeowners borrow against their equity up to a certain limit and access those funds on an as-needed basis. This means you only pay interest on your current balance, not a lump sum loan.

In contrast to a reverse mortgage, you will have to make monthly payments, and lenders will evaluate your income and credit when reviewing your application.

Journalist Brai Odion-Esene contributed to this article.

Frequently Asked Questions (FAQs)

What is the cost of a reverse mortgage?

Reverse mortgages usually have high fees and closing costs, as well as a mortgage insurance premium. For loan amounts equal to 60% or less of the home’s appraised value, this premium typically equals 0.5%. If the reverse mortgage exceeds 60% of the home’s value, the premium can rise to 2.5% of the loan amount.

Can I back out of my reverse mortgage?

Yes. With most reverse mortgages, you have three business days after the loan closes to cancel the deal for any reason, without penalty. This is known as your right of “rescission.”

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