Debunking the Top 10 Reverse Mortgage Downsides

Reverse Mortgage Misconceptions/Myths

Reverse mortgages have long been surrounded by misconceptions, leading many to believe they come with significant downsides.  In reality, many of these concerns are based on myths.  In this guide, we will debunk the top 10 common claims about the downsides of reverse mortgages, providing you with the clarity you need.

Whether you’re exploring reverse mortgage options for yourself or assisting a loved one, understanding the facts behind these so-called ‘downsides’ will help you make a confident and informed decision.

Claim #1: Reverse Mortgages Have Growing Interest and Fees

Concern: Skipping monthly payments may seem like an advantage, but the accumulating interest can significantly increase the total loan balance.

Truth: Like any loan, interest accrues on a reverse mortgage. However, one major benefit is flexibility.  You are not required to make monthly payments, but you can choose to pay down the interest whenever you want without penalty. This allows you to manage the loan balance effectively and control how much interest accrues over time.

Claim #2: Reverse Mortgages Have Complex Loan Terms

Concern: Reverse mortgages have complicated terms that can lead to unexpected surprises regarding repayment or property use.

Truth: While reverse mortgages have specific terms, they are not inherently confusing.  With required counseling, online tools, and supportive lenders, you’ll have the resources to understand the details thoroughly.  Plus, you can cancel without penalty if you feel it’s not the right choice for you.

Claim #3: Reverse Mortgages Affect Needs-Based Programs

Concern: Receiving funds from a reverse mortgage could jeopardize eligibility for programs like Medicaid or Supplemental Social Security Income.

Truth: While reverse mortgage proceeds can affect needs-based programs, careful planning can help you avoid issues.  Most programs consider your assets at the end of the month.  By spending funds during the same month they are received, you can maintain eligibility for these benefits. Consult with program counselors to stay compliant with specific requirements.

Claim #4: Reverse Mortgages Create Repayment Problems for Heirs

Concern: Heirs must sell the property or refinance the loan to keep it, potentially causing financial strain.

Truth: Reverse mortgages are not designed to be passed down, but open communication with heirs can prevent complications.  Heirs should be informed of their options, such as selling the property or refinancing the loan.  Establishing a family trust or consulting an estate attorney can further simplify the process, ensuring heirs are prepared.

Claim #5: Reverse Mortgages are Rising Debt and Falling Equity

Concern: Home equity decreases as payments are received and interest accumulates, leaving less for heirs.

Truth: While equity can decrease if home values stagnate or interest builds, this isn’t unique to reverse mortgages.  Unlike traditional mortgages, reverse mortgages are non-recourse loans, meaning neither you nor your heirs are responsible for any shortfall if the home’s value doesn’t cover the loan balance.

Claim #6: Reverse Mortgages Have Occupancy Restrictions

Concern: Moving permanently, such as to a nursing home, makes the loan due, complicating living situations.

Truth: Reverse mortgages have occupancy requirements, but you can be away for up to 12 months temporarily (e.g., for rehabilitation).  If permanent relocation is needed, planning early can ensure a smooth transition without undue stress.

Claim #7: Reverse Mortgages Can Be a Burden on Heirs

Concern: Heirs are left to manage repayment and avoid foreclosure under tight deadlines.

Truth: Proper preparation minimizes this burden.  By educating heirs on loan terms, authorizing communication with lenders, and establishing clear plans, the process becomes manageable. Early planning ensures heirs know what to expect and how to proceed.

Claim #8: Borrowers Must Maintain Taxes & Insurance

Concern: Failing to keep up with home maintenance, taxes, or insurance could lead to default.

Truth: As with any mortgage, maintaining taxes and insurance is essential.  Many lenders offer programs to assist borrowers in managing these obligations.  Staying proactive helps ensure your loan remains in good standing.

Claim #9: Reverse Mortgages Have a Risk of Negative Equity

Concern: Declining home values may result in the loan balance exceeding the property’s worth, leaving negative equity.

Truth: Reverse mortgages are non-recourse loans, meaning heirs or estates are not responsible for any shortfall.  Heirs can repay the loan at 95% of the home's current market value or choose to walk away without financial liability.

Claim #10: Potential for Scams

Concern: The complexity of reverse mortgages makes them a target for scams.

Truth: Scams typically involve misuse of proceeds rather than the loan itself.  Choosing a reputable HUD-approved lender is key.  Open family communication ensures seniors make informed and secure decisions, avoiding fraud.