Reverse mortgages are not inherently "bad," but they are often risky, expensive, and complex, acting best as a last-resort financial tool for seniors. They allow homeowners 62+ to convert home equity into cash without monthly repayments, but they can deplete home equity, increase debt, and lead to foreclosure if taxes, insurance, or maintenance are not paid.
Yes, many seniors use their reverse mortgage funds to cover healthcare and long-term care expenses. This can be a valuable way to age in place while managing medical costs.
One out of every ten reverse mortgage is in default and could face foreclosure. Reverse mortgages are expensive. After ten years, interest and ongoing fees on a lump sum reverse mortgage can add up to more than $100,000, after twenty years interest can reach more than $300,000 on top of the original loan amount.
Dave Ramsey strongly opposes reverse mortgages, calling them "scams" and "rip-offs" due to high fees, high interest rates that build up, and the risk of seniors owing more than their home's value, leading to potential foreclosure if taxes or insurance aren't paid, despite the lack of monthly payments. He views them as predatory products that erode home equity and trap seniors in debt, advising against them as a retirement strategy.
They are expensive—with high closing costs and interest rates higher than standard prime mortgages. Because the loan balance grows over time and comes due after the borrower dies, it may not be a good option for seniors who want to leave their home to a child or other heir.
So a mortgage is the one kind of debt we don't yell at you for. But if you go that route, stick to the 25% rule—remember, that means never buying a house with a monthly payment that's more than 25% of your monthly take-home pay.
The good news for seniors is that taking out a reverse mortgage does not directly reduce or interfere with Social Security retirement benefits. Social Security payments are calculated based on your earnings history, not your assets or the type of financial products you use in retirement.
Even if you don't get as much money from a home equity loan as you would with a reverse mortgage, they're a much safer option. They set up immediate monthly payments and don't include the danger of rapidly increasing debt. That alone makes them a better choice for most people.
In 1998, 26% of Americans ages 65-74 held home-secured debt such as mortgages, yet by 2022, that grew to 32.2%. 1 This trend is particularly pronounced among those ages 75 and up, with 27.6% holding home-secured debt in 2022, up from 11.6% in 1998.
The "6-month rule" for reverse mortgages refers to the requirement that the loan must be repaid if the home is no longer your principal residence for more than six consecutive months (or 12 for medical stays). It also means that after the last borrower dies, heirs generally have six months (after a "due and payable" notice) to repay the loan, sell the home, or arrange a deed-in-lieu of foreclosure to avoid foreclosure proceedings, with potential extensions for selling.
If you're a homeowner aged 62 or older, a reverse mortgage can help you obtain tax-free income, allowing you to stay in your home, pay bills, supplement your income and more. A reverse mortgage isn't free money: The borrowing costs can be high, and you'll still need to pay for homeowners insurance and property taxes.
Reverse mortgage borrowers remain the owners of the home. Borrowers are still responsible for all applicable taxes, insurance, maintenance, and repair. Borrowers can never owe lenders more than the value of their home at the time the loan is repaid.
Your home's value
The value of your home is one of the biggest factors in how much you can borrow with a reverse mortgage. Generally speaking, you can usually get somewhere between 40% to 60% of your home's appraised value. And the higher your home value is, the more money you can potentially access.
Reverse mortgages are increasing in popularity with seniors who have equity in their homes and want to remain in their homes or supplement their income.
Suze Orman strongly advocates paying off your mortgage by retirement for financial freedom and peace of mind, but her advice on how varies by situation, often prioritizing a solid emergency fund and retirement savings first, especially if interest rates are low. While she pushes for paying down debt aggressively (even reducing retirement savings beyond the 401(k) match), she cautions against draining savings for low-interest mortgages if it leaves you vulnerable to job loss or emergencies, suggesting you should have a strong safety net before using savings to pay it off.
The 3-7-3 Rule in mortgages isn't a loan type but a federal timeline from the TILA-RESPA Integrated Disclosure (TRID) rule, ensuring borrower protection by mandating disclosures within 3 business days of application, a 7-business-day wait between the initial Loan Estimate and closing, and another 3-day wait if significant changes (like APR) occur, giving borrowers time to review costs before committing to a loan.