Reverse mortgages are a type of loan that allows homeowners aged 62 and older to borrow against their home equity. They don't require repayment until the home is sold or the borrower dies, giving individuals a bit more financial flexibility by eliminating a monthly mortgage payment. In fact, recent data shows 26,000 loans were issued in fiscal year 2024.
However, financial experts like Suze Orman strongly advise against them, in large part because they can wreak havoc financially on those who might not fully understand what they're signing up for.
Here are six reasons to reconsider a reverse mortgage, along with some potentially smarter homeowner money moves instead.
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They're loaded with hidden fees
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A reverse mortgage may seem like a simple way to access your home's equity, but it can be surprisingly expensive. Suze Orman has repeatedly warned that these loans are far from free money.
Reverse mortgages often include upfront charges such as origination fees, closing costs, and mortgage insurance premiums. Over time, the loan also accrues monthly interest, increasing the total amount you'll eventually owe.
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You'll still have other home-related expenses
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A reverse mortgage doesn't eliminate ongoing responsibilities. You'll still pay for property taxes, homeowner's insurance, and general home maintenance. Failing to meet any of these obligations can put your home at risk.
These combined costs can quickly add up, potentially reducing much of the equity you've built over the years. It's one of the key reasons Orman advises caution.
Your eventual home sale could be delayed
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A reverse mortgage might present challenges when it's time to sell. For example, if your home's value declines after taking out a reverse mortgage, you or your heirs could face problems. As Orman has noted, unexpected factors, such as natural disasters, high interest rates, or an economic downturn, could affect home values.
You may owe more than you receive in a home sale
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In some cases, the sale price may not fully cover the balance of your reverse mortgage. Depending on the type of reverse mortgage, your mortgage insurance might absorb the difference. However, this process can take time and could delay access to funds for medical care, assisted living, or other urgent needs.
It's easy to be confused or scammed by a reverse mortgage
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Reverse mortgages are complicated financial arrangements, and people sometimes sign up for them without understanding all the details. Orman shared a story of a 71-year-old who was convinced to take out a reverse mortgage without full knowledge. As a result, she's now "stuck" in a house that she still owes money on and is getting only an additional $8,000 a year, far less than she had expected.
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Your home equity becomes unavailable in the event of an emergency
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According to Orman, one of the most significant risks of a reverse mortgage is that it can eliminate the financial cushion provided by your home's equity. You may need this equity to cover essentials, such as long-term care or costly home modifications resulting from health issues. If that equity isn't available, you may be unable to afford necessities.
Other options to consider instead of a reverse mortgage
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Orman often says on her podcast that if you need extra cash, a reverse mortgage shouldn't be your first choice. Other financial strategies usually offer more flexibility and fewer long-term drawbacks.
Think about downsizing
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One option is to sell your home and downsize. Depending on your home's value, you may be able to downsize to a smaller place and invest the sale proceeds in a high-yield savings account or annuity. This approach can provide you with a steady, passive income.
Investigate less expensive loans
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If moving isn't an option, you might consider a home equity loan or home equity line of credit (HELOC). Each option allows you to access a portion of your home's value while retaining ownership. Interest rates on these loans are often lower than those for reverse mortgages, and you can repay the balance when you sell the property.
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Explore loans that pay out a lump sum
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One possibility is cash-out refinancing. This type of home loan replaces your existing mortgage with a larger one, and you receive the difference in cash. It's a way to access your home's built-up equity while maintaining full ownership and control. You can use the extra money for other financial needs.
Bottom line
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Reverse mortgages can be expensive and may leave borrowers with additional financial or legal problems. It's why Orman says, "I would never advise to do one in a million years."
If you're a retiree considering a reverse mortgage, speak with a qualified financial expert to explore other options and determine what makes the most sense for you to continue to enjoy a stress-free retirement.
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