Reverse Mortgage

Previously, I posted about the benefits of reverse mortgages—and yes, they are substantial. Eliminating a monthly mortgage payment can really free up cash flow. Having the ability to access what was once “untouchable” home equity gives older homeowners more flexibility in dealing with major expenses like medical bills, home repairs, or simply improving quality of life.

But with all that upside, there’s another half of the picture that deserves a closer look. These aren’t free-money products—they’re financial tools. And like all tools, if you don’t fully understand how to use them, they can bite back.

Minimum Equity Requirements

One of the first hurdles: reverse mortgages require that you hold at least 50% equity in your home—sometimes more. These loans are primarily targeted at homeowners who’ve lived in their homes for a long time and built up considerable equity. For many, this is locked-in wealth—hard to access without refinancing or selling.

While refinancing might not improve monthly cash flow, it could provide a lump sum. Selling, on the other hand, means finding a new place to live—a major emotional and logistical challenge for seniors. And that’s not even counting the fact that finding affordable housing is increasingly difficult.

So if you’re sitting on a lot of home equity and short on monthly cash, a reverse mortgage might look like a lifeline. But what’s on the other side of the ledger?

High Fees and Costs

Let’s start with the dollars and cents.

Reverse mortgages come with significant upfront fees, just like any refinance. These may include:

• Appraisal fees
• Origination fees
• Closing costs
• Mortgage insurance premiums (yes, even though you’re borrowing against your own house)

That mortgage insurance charge still bugs me. The lender already controls a huge chunk of the equity. Their risk is low—so what exactly are they insuring? Yes, it’s an FHA requirement tied to reverse mortgages, but it sure feels more like a way for the bank to pad their return than to truly protect anyone.

And remember: these fees are deducted from the loan proceeds, so they quietly reduce how much cash you’ll get up front—before you ever see a dime.

Complicated Terms and Fine Print

These aren’t your run-of-the-mill mortgages. Reverse mortgages come with layers of terms and conditions, some of which may not be obvious upfront.

Let’s talk about the line of credit, often marketed as a flexible cash reserve. Sounds great, right? But here’s what doesn’t always get explained: every dollar you draw adds to your loan balance, including interest. And that interest compounds. Unlike a traditional line of credit, there’s no monthly payment to chip away at the balance—so the amount owed balloons quietly over time.

And don’t assume the interest rate is fixed. Most reverse mortgages have variable interest rates, which are adjusted monthly—and as with most banks, those rates tend to go up faster than they come down. On top of that, lenders add a margin fee—a little bank icing on your debt cake.

Loss of Home Equity

Here’s the real kicker: a reverse mortgage is just a regular mortgage in disguise—only instead of you paying them each month, they’re quietly adding your “would-be payments” to the loan balance and you pay later.

As the interest, fees, and borrowed funds stack up, your equity goes down. You’re effectively eating away at the inheritance your heirs may have counted on—or even your own future ability to tap into that equity again.

Let’s revisit a scenario from my prior article:
Your home is worth $1,000,000 and you still owe $400,000—so that’s $600,000 of equity, with a $2,000 monthly payment. While you no longer need to make that monthly payment, it’s added to your loan balance. That means your equity is being reduced by at least $24,000 a year—and that doesn’t include interest charges, which compound over time.

Sure, the theory is that real estate values will rise and offset these costs—but if they don’t grow faster than your loan balance, you’ll end up house rich and equity poor.

Impact on Government Benefits

If you rely on need-based programs like Medicaid or SSI, know this: the cash you receive from a reverse mortgage could affect your eligibility. These aren’t always disqualifiers, but you’ll need to plan carefully—especially if the proceeds push your income or assets over program thresholds.

Foreclosure Risk Is Still a Thing

Reverse mortgage ads often promise: “You’ll never lose your home.” But that’s not entirely true.

You’re still required to:

• Pay property taxes
• Keep homeowner’s insurance active
• Maintain the home in good condition

And here’s the twist: you can’t escrow those costs like in a traditional mortgage. It’s all on you to stay current. Miss a few tax payments? Let insurance lapse? The lender can—and will—foreclose.

Also, while rare, market downturns (like 2008–2009) can create trouble. If the loan balance nears or exceeds the home’s value (remember, you started with at least 50% equity), you’re walking a tightrope that could snap—especially if you’ve maxed out your line of credit.

A Summary from the Other Side

Reverse mortgages can be a great fit for certain homeowners, especially those who:

• Want to age in place
• Have no heirs (or heirs they don’t intend to leave the home to)
• Need improved cash flow without relocating

But this is not “found money.” It’s borrowed money—with terms, fees, and consequences.

Banks don’t make money on good intentions—they play the long game. They sacrifice short-term interest income for a larger return in the long run. Along the way, they collect fees, insurance premiums, and interest—while your loan balance quietly grows.

My Final Take

I’m pretty happy with my own experience—but I’m still grumbling about:

• Mortgage insurance I didn’t need and don’t want
• Interest that’s anything but fixed (despite what I was initially told)
• Miscellaneous charges that just keep getting tacked on

So if you’re considering a reverse mortgage: read everything. Ask questions. Get independent advice. And make sure you’re okay with the long-term picture, not just the short-term cash boost.

Because—as with all financial decisions in retirement—the key isn’t just what you gain. It’s what you might give up in the process.