Reverse Mortgage Disadvantages: What You Need to Know

If you're a homeowner who's at least 62 years old with a paid-off (or nearly paid-off) home loan, a reverse mortgage may be the answer to your money problems. However, reverse mortgage disadvantages could take some of the shine off these home loans. In some ways, reverse mortgages loans are the opposite of traditional mortgages. Instead of borrowers making monthly payments to mortgage lenders, with reverse loans, the lender pays the borrower.

Sounds great, right? Possibly. Before you sign on the dotted line, consider the potential downside to these mortgages and how they may affect your situation.

Restrictions on Use of Reverse Mortgage Funds

There are several reverse mortgage options, including Home-Equity Conversion Mortgages (HECMs) backed by the U.S. Department of Housing and Urban Development (HUD), private reverse mortgages offered by lending companies, and single-purpose-reverse mortgages backed by non-profit organizations as well as some municipal and state-governments. Though they may come with the lowest interest rate, one of the single-purpose reverse mortgage disadvantages is that they can only be used for one purpose, and that purpose is determined by the lender. Common examples are home repairs, home improvements, or property taxes.

(Note: Restrictions on use of reverse mortgage proceeds only apply to single purpose loans, which are for low-income or very low-income homeowners. For most people, there are no restrictions – and reverse mortgage proceeds are tax free.)

Reverse Mortgage Fees

One of the first reverse mortgage disadvantages you will encounter are upfront costs -- they can be high. There may be a mortgage origination fee. Applicants for HECMs also pay a mortgage insurance premium because the federal government insures the loan. Some lenders may also charge service fees during the loan.

(Note: Not all reverse mortgage lenders charge origination or service fees. It's important to shop and compare offers from several lenders and select the best deal.)

Interest Accrues

Reverse mortgages are loans. Once you draw on reverse mortgage funds, whether you choose a lump sum, monthly payments or a line of credit, interest accrues on the balance – as it does with any loan, including a traditional home loan. What's different with a reverse mortgage is that because the borrower makes no monthly payments, the interest is added to the loan balance. When that occurs, the borrower is paying interest on interest.

Reverse Mortgage Occupancy Requirements

You may not get as much out of your reverse mortgage as you like. After paying their upfront charges, some borrowers who expect to get monthly checks for life have to repay their reverse loan early because they move to an assisted living situation.

(Note: on the other hand, homeowners requiring assistance may choose to use a reverse mortgage to pay for in-home assistance – so they won't have to move to an institutional setting.)

Property Tax or Homeowners Insurance Delinquencies

To qualify for the HECM reverse mortgage, your credit history must show that you can be relied on to pay your property taxes and homeowners insurance. If you don't pass HUD's financial assessment, the lender will either decline your application or hold back some of the reverse mortgage proceeds and pay those costs on your behalf.

Sole Borrower and Joint Borrower Restrictions

If there are people other than the borrower and his or her spouse living in the home when the borrower dies, they are considered "tenants" and will have to find a way to refinance or repay the loan if they want to continue living there.

Once you've considered the pros and cons of a reverse mortgage, compare loan offers in minutes with LendingTree's easy online shopping tools.

Find out how much you qualify for.