Is a reverse mortgage right for you as a source of retirement income? We’ve asked that question many times here on the Blog, and the answer is always the same: “Maybe.” The fact remains that a reverse mortgage isn’t right for everyone, but it might be an excellent option for you – provided you research carefully and choose a reliable lender.

What might bring new attention to reverse mortgages, however, is the rise in home equity. Baby boomers entering retirement (or already retired) are sitting on many trillions of dollars’ worth of home value, and the vast majority of those boomers have reached the age (62) where a federally-guaranteed reverse mortgage (called a home equity conversion mortgage, or HECM) is permitted. Seems like the conditions are ripe for a reverse mortgage boom.

With that in mind, here’s the latest article we’ve seen on the subject, this one from NextAvenue, written by reporter Rachel Leland. The information may seem familiar, but the topic is always worth a fresh look. If you’re considering a reverse mortgage, good information is critical. As the article states, “When homeowners consider whether to take out a reverse mortgage, knowing how the process works is half the battle.”

Age in Place Securely with a Reverse Mortgage

“Reverse mortgages can help older adults meet the costs of aging in place and enjoy financial security,” Leland begins. “However, it is essential to fully understand the terms and risks of a reverse mortgage before signing on the dotted line.” 

The reason for caution is obvious: a bad decision can rob homeowners of their largest asset.

“When considering a reverse mortgage, which is one way for homeowners to borrow money using their home equity as security for the loan, older adults can be vulnerable to financial scams and overzealous lenders who don’t have the borrower’s best interests in mind,” the article warns. At the same time, borrowers eager to tap their equity might dismiss the possibility of unforeseen circumstances – illness, for example, or the death of a spouse – that might turn a reverse mortgage into an inappropriate choice.

Reverse Mortgages Tempt Many as Home Values Rise

As noted above, home values are skyrocketing in most of the U.S. “Soaring home prices have enabled homeowners to build significant equity in their properties,” Leland observes, “making a reverse mortgage, on its face, a compelling option for older adults.”

Leland spoke with HUD Assistant Secretary Julia Gordon. “Right now, seniors have trillions of dollars locked up in their home equity and increasingly, seniors want to age in place,” Gordon told NextAvenue. “The combination of those two things means that they are looking for a way to tap their home equity without moving out of their house.”

Nevertheless, Leland reminds us, even if you’re a good candidate, a reverse mortgage is a complex financial instrument, not a one-size-fits-all solution. Moreover, Leland writes, ignorance is not bliss: “Not understanding the loan’s terms or potential scams can put you at risk of default.”

Better Consumer Education Leads to Fewer Loan Defaults

The NextAvenue article has a brief definition of a reverse mortgage, which we’ll paraphrase in the interests of space. Basically, qualifying homeowners can borrow money using their home’s equity as collateral. But borrowers do not make monthly mortgage payments, making these loans especially attractive as a potential income source in retirement.

However, homeowners are required to pay property taxes and homeowner insurance. (They also have to handle property maintenance and upkeep.) Falling behind on these expenses can trigger a default, putting home equity at risk.

The good news is that, despite the risks, defaults on reverse mortgages are on the decline. As Leland writes, “Between 2019 and 2023, defaults declined by 24 percent, from 40,493 to 30,924, according to data from HUD.”

HUD-Insured Reverse Mortgages are Most Common

“According to the Consumer Finance Protection Bureau, the most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), a loan insured by HUD,” says NextAvenue. Borrowers must be at least 62 years old to qualify for an HECM. By contrast, the article adds, there are private reverse mortgages – not insured by the government – for which homeowners as young as 55 may qualify.

Because this is a major financial decision, HUD requires borrowers to have a counseling session with an approved advisor before an HECM is issued. Leland writes, “Reverse mortgage counseling typically costs between $125 to $200, according to American Advisors Group. A lender cannot pay the counseling fees [in order] to ensure impartiality.”

As HUD’s Gordon explained to NextAvenue, these counselors make sure borrowers understand the implications and features of their mortgage. One example: with a reverse mortgage, the loan balance actually increases every month. That’s because borrowers don’t make principal or interest payments. This is a reality which borrowers might not anticipate or plan for.

When Homeowner Dies or Moves, Reverse Mortgage Comes Due

There are two events that require the reverse mortgage to be paid off: when the borrower dies, or when the borrower sells the house and moves. (Lenders require that a home with a reverse mortgage must be the primary residence of the borrower.) This makes it imperative that retirees alert their heirs to the fact that the home is mortgaged.

“Homeowners considering taking out a reverse mortgage should remember that the decision could have long-term implications,” Leland says, “such as being unable to leave their home as an asset to their children.”

Heirs will have a time period after the homeowner dies (usually one year) during which they can either sell the house and satisfy the loan, or pay off the reverse mortgage balance and decide to keep the house. Either way, if your heirs assume they’re inheriting a “free and clear” home, they’re going to be disappointed if you don’t explain the situation ahead of time.

This is another benefit of HUD-mandated loan counseling. “Counselors always try to encourage borrowers to discuss with their families any implications,” HUD’s Gordon told Leland. “Obviously, you can’t make that a requirement, but it’s something that’s important for people to understand.”

Borrows Must Be Wary of Reverse Mortgage Scams

With so much money on the line, crooks and scammers are always lurking in the shadows. “New reverse mortgage scams targeting older adults pop up regularly,” Leland warns, “but they are often targeted by tried-and-true scams that have existed for decades.”

One example is the “foreclosure scam.” Crooks target homeowners at risk of foreclosure by offering a reverse mortgage as lifeline. Unfortunately, these scammers tack on exorbitant fees and high closing costs that drain a large portion of home equity.

Another ploy is referred to as the “equity theft” scam. In this rip-off, Leland explains, “dishonest appraisers and loan officers collaborate to inflate a home’s value, making it seem like the homeowner has more equity than they do. Then, the scammers convince the homeowner to get a reverse mortgage to cash in on their supposedly higher equity.” The crooks either demand higher fees or some form of kick-back from victimized homeowners.

Adult Kids Need to Ensure Parents Aren’t Victimized

Family members are often the first line of defense against rip-off artists, especially when something as critical as home equity is on the line.

“You’ll be able to find on the internet all kinds of companies saying, ‘We’ll sign a contract, and you’ll agree to give me your home appreciation in the future for cash now . . . or we’ll buy your house, but then we’ll let you live in it,” Gordon told Leland. “These are all completely unregulated, and if it were my parent looking at it, I’d be extremely wary of that kind of arrangement.”

This is another point in favor of counseling. “While scams targeting older homeowners can appear daunting and complicated,” Leland writes, “a seasoned reverse mortgage counselor is likely familiar with the most common pitfalls lurking for homeowners.”

Rajiv: Reverse Mortgage Income Can Help You Age in Place

We asked Rajiv Nagaich to comment on this article, and he reiterated a warning he has stated many times before. A reverse mortgage is right for some but not for all.

“The first question I would ask,” says Rajiv, “is how long you plan to stay in your present home. Is this the last house you want to live in? If not – if you’re pretty sure you’ll be moving in a few years for whatever reason – then I would strongly caution you not to take out a reverse mortgage. But for those who really plan to age in place, it can be a very good option – provided that it’s part of a comprehensive retirement plan that includes a financial dashboard.”

For those who opt for a home equity conversion mortgage, Rajiv suggests taking the proceeds in the form of a line of credit. “I know people who got a reverse mortgage and decided t0 take a lump sum payment or a monthly check,” he explains, “only to find they didn’t really need as much money as they thought they might. A line of credit means you only take out money as you need it. It’s a good combination of security and caution.”

But there’s one caveat that borrowers often overlook. “Don’t forget that proceeds from a reverse mortgage count as income,” Rajiv cautions. “If you anticipate applying for some form of means-tested entitlement in the future, such as Medicaid, that income might disqualify you from some or all of those benefits.”

It’s yet another reason to get qualified, unbiased advice from a professional before you sign on the dotted line.

Rajiv Nagaich – Your Retirement Planning Coach and Guide

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(originally reported at www.nextavenue.org)