7 Reasons to Think Twice About Reverse Mortgages

Reverse mortgages are often a bad idea because they charge $20,000-$40,000 in upfront fees, accumulate interest that compounds monthly and leave heirs with little to no inheritance. A 70-year-old borrowing $150,000 on a $400,000 home could owe $280,000 after 10 years due to compounding interest—even without taking another dollar. For most seniors, alternatives like HELOCs, downsizing or family loans offer better outcomes with fewer risks.

What Is a Reverse Mortgage?

A reverse mortgage lets homeowners 62 and older borrow against their home equity without making monthly payments. The loan balance grows over time as interest compounds. Repayment happens when the borrower sells the home, moves out or dies.

The most common type is a Home Equity Conversion Mortgage (HECM), backed by FHA. Private “jumbo” reverse mortgages exist for higher-value homes.

How you receive money:

• Lump sum (fixed rate only)
• Monthly payments (tenure or term)
• Line of credit (draw as needed)
• Combination of above

What triggers repayment:

• Selling the home
• Moving out for 12+ months
• Failing to pay property taxes or insurance
• Not maintaining the property
• Death of last borrower

Reason 1: Astronomical Upfront Costs

Reverse mortgage fees far exceed traditional mortgages. On a $400,000 home, expect to pay:

Fee Type	Typical Cost
Origination fee	$6,000 (2% of first $200K + 1% of remainder)
Mortgage insurance premium	$8,000 (2% of home value)
Closing costs	$3,000-$5,000
Appraisal	$400-$700
Counseling	$125
Total upfront	$17,525-$19,825

These fees typically get rolled into the loan balance, meaning you pay interest on them for years. That $18,000 in fees becomes $26,000 after 5 years at 6% interest.

Margaret Thompson, 72, got a reverse mortgage on her Phoenix home in 2019. She borrowed $180,000 on her $380,000 property. After fees, she received $161,000—losing $19,000 before getting a dime.

Reason 2: Compounding Interest Destroys Equity

Unlike traditional mortgages where payments reduce the balance, reverse mortgage balances grow every month as interest compounds on unpaid interest.

Example: $150,000 reverse mortgage at 6.5%

Years	Balance Owed	Interest Added
Start	$150,000	—
Year 2	$170,348	$20,348
Year 5	$206,632	$56,632
Year 10	$284,894	$134,894
Year 15	$392,583	$242,583

After 10 years without borrowing another dollar, you owe $135,000 more than you started with. That money comes directly from your home equity.

Robert Chen took a $200,000 reverse mortgage on his $500,000 Los Angeles home at age 68. By age 83, he owed $420,000. When he moved to assisted living at 85, the loan balance had reached $485,000—nearly the entire home value.

Reason 3: Your Heirs Get Little or Nothing

Reverse mortgages typically consume most or all home equity by the time repayment comes due. Your children inherit a debt, not an asset.

What happens when you die:

1. Lender sends notice to heirs
2. Heirs have 30 days to decide: sell, refinance or pay off
3. Extensions possible but limited
4. If balance exceeds value, heirs walk away (no deficiency)

The “non-recourse” feature sounds good—heirs can’t owe more than the home’s worth. But that just means they inherit nothing rather than inheriting debt.

James Patterson, 78, wanted to leave his $450,000 home to his three children. He took a $175,000 reverse mortgage “just for emergencies.” Over 12 years, he drew $220,000 total. When he passed at 90, the balance had grown to $385,000. After selling costs, his children split $40,000—less than $14,000 each.

Reason 4: You Can Still Lose Your Home

Many seniors believe reverse mortgages eliminate foreclosure risk. They’re wrong. You can lose your home if you:

Fail to pay property taxes: Miss payments and the lender can foreclose. This happens more than you’d think—seniors on fixed incomes struggle when taxes increase.

Stop paying homeowners insurance: Lenders require coverage. Lapse the policy and they’ll force-place expensive insurance or call the loan due.

Don’t maintain the property: Deferred maintenance triggers default. If inspectors find serious disrepair, you must fix it or face foreclosure.

Move out for 12+ months: Entering a nursing home or moving in with family triggers repayment, even if you intended to return.

Between 2014 and 2019, roughly 18% of HECM borrowers faced foreclosure, primarily for tax and insurance defaults. That’s nearly 1 in 5 seniors losing the home they thought was protected.

Dorothy Williams, 76, entered a rehabilitation facility after a hip replacement. Her stay extended to 14 months. The lender declared her in default for “failure to occupy.” She had to sell her home of 40 years while recovering from surgery.

Reason 5: Fees Never Stop

Beyond upfront costs, reverse mortgages charge ongoing fees that compound alongside your loan balance.

Ongoing costs:

• Monthly mortgage insurance: 0.5% of loan balance annually
• Servicing fee: $30-$35 per month
• Interest: Currently 6.5%-8% for variable rates

On a $200,000 balance, you’re paying roughly $1,000/year in mortgage insurance alone—and that fee grows as your balance increases.

10-year fee accumulation example:

Fee Type	Annual Cost	10-Year Total
Mortgage insurance (0.5%)	$1,000+	$15,000+
Servicing fee	$400	$4,000
Accrued interest	Varies	$90,000+

These fees get added to your balance, earning interest themselves. It’s fees on fees—a compounding machine working against you.

Reason 6: Interest Rates Are Higher

Reverse mortgage rates run 1-2% higher than traditional mortgage rates. When conventional loans are at 6.5%, reverse mortgages are at 7.5-8.5%.

Current rate comparison:

Loan Type	Typical Rate
30-year fixed	6.5-7.0%
HELOC	8.5-9.5%
Reverse mortgage (variable)	7.5-8.5%
Reverse mortgage (fixed)	8.0-9.0%

Higher rates accelerate the compounding problem. The difference between 6.5% and 8% on a $150,000 balance adds $22,500 to what you owe after 10 years.

Reason 7: Limited Borrowing Amount

You won’t get anywhere near your home’s full value. HECM lending limits depend on age, interest rates and home value.

Approximate borrowing limits (Principal Limit):

Age	% of Home Value Available
62	38-42%
70	45-50%
75	50-55%
80	55-60%
85	60-65%

A 70-year-old with a $400,000 home might access only $180,000-$200,000. After fees, that drops to $160,000-$180,000 in actual proceeds.

The 2024 HECM limit is $1,149,825. Even if your home is worth $2 million, you’re capped at borrowing against the limit.

When Reverse Mortgages Might Make Sense

Despite the downsides, reverse mortgages work for a narrow set of circumstances:

Potentially appropriate if:

• You have no heirs or don’t care about leaving an inheritance
• You’ll stay in the home until death
• You have no other assets or income sources
• You’ve exhausted all alternatives
• You understand and accept the costs

Real example where it worked: Helen Martinez, 78, was widowed with no children and a paid-off $350,000 home. Her Social Security covered basic expenses but nothing more. A reverse mortgage gave her $800/month in tax-free income for life. She understood she was spending her only asset and accepted that tradeoff.

Better Alternatives to Reverse Mortgages

Before considering a reverse mortgage, explore these options.

Home Equity Line of Credit (HELOC)

Pros:

• Lower fees (often under $1,000)
• Interest only on what you draw
• Pay down balance anytime
• Keep full ownership control

Cons:

• Monthly payments required
• Credit approval needed
• Variable rates

A HELOC at 8.5% with minimum payments costs less than a reverse mortgage at 7.5% with compounding interest—because you’re actually paying something down.

Cash-Out Refinance

Pros:

• Fixed rate available
• Lower costs than reverse mortgage
• Keep making payments you can handle

Cons:

• Monthly payments required
• Income qualification needed

Downsizing

Selling your home and buying something smaller frees up cash without debt.

Example: Edward and Patricia Johnson sold their $500,000 home and bought a $300,000 condo. After costs, they pocketed $180,000 cash plus eliminated property maintenance headaches.

Family Loan

A loan from children or other family members can work better for everyone:

• Lower or no interest
• Flexible repayment terms
• Keep inheritance in the family
• Document properly for tax purposes

Rent Out Part of Your Home

An accessory dwelling unit or room rental provides income without borrowing:

• Monthly cash flow
• Keep full home ownership
• Maintain all equity

Government Assistance Programs

Many seniors qualify for programs they don’t know about:

• Property tax deferral programs
• Utility assistance
• SNAP food benefits
• Medicare Savings Programs
• State pharmaceutical assistance

Questions to Ask Before Getting a Reverse Mortgage

If you’re still considering a reverse mortgage, ask these questions:

1. What will I owe in 5, 10 and 15 years? Get written projections.

2. What happens if I need nursing home care? Understand the 12-month rule.

3. How will this affect my Medicaid eligibility? Lump sums can disqualify you.

4. What are ALL the fees? Get itemized costs in writing.

5. What are my alternatives? A good counselor explains other options.

6. How do my heirs feel? Have honest family conversations.

7. What if home values drop? Understand the worst-case scenario.

Frequently Asked Questions

What is the downside of a reverse mortgage?

The main downsides are high upfront fees ($15,000-$40,000), compounding interest that grows the balance monthly, risk of foreclosure if you don’t pay taxes and insurance and little to no inheritance left for heirs. A $150,000 reverse mortgage can grow to $280,000 in 10 years without borrowing another dollar.

Can you lose your house with a reverse mortgage?

Yes. You can lose your home if you fail to pay property taxes, stop paying homeowners insurance, don’t maintain the property or move out for more than 12 months. Roughly 18% of reverse mortgage borrowers faced foreclosure between 2014-2019, primarily for tax and insurance defaults.

What does Suze Orman say about reverse mortgages?

Financial expert Suze Orman generally advises against reverse mortgages, calling them a “last resort” option. She recommends exhausting alternatives like downsizing, HELOCs or family assistance first. She notes the high costs and compounding interest make them expensive compared to other options.

Who benefits most from a reverse mortgage?

Reverse mortgages work best for seniors 75+ who plan to stay in their home until death, have no heirs or don’t prioritize leaving an inheritance, have no other assets or income sources and have exhausted all alternatives. This describes a small fraction of potential borrowers.

What happens when the reverse mortgage borrower dies?

Heirs receive notice and have 30 days (with possible extensions to 12 months) to sell the home, refinance the balance or pay off the loan. If the balance exceeds the home’s value, heirs can walk away with no personal liability. In most cases, heirs inherit little to nothing after the loan is satisfied.

Are reverse mortgage rates higher than regular mortgages?

Yes. Reverse mortgage rates typically run 1-2% higher than conventional loan rates. When 30-year fixed rates are 6.5%, reverse mortgages charge 7.5-8.5%. This higher rate accelerates the compounding that erodes your equity.

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