Homeowners with a reverse mortgage must continue to pay all property-related taxes, homeowners insurance premiums, and flood insurance (if required). They are also required to maintain the home, keeping it in good repair, and live in the home as their primary residence. Failure to meet these obligations can lead to foreclosure.
As a reverse mortgage borrower, you have three main responsibilities: You are required to pay your property charges—such as property taxes and homeowners insurance—on time. Your home must be kept in good repair. Your home must be your principal residence.
Interest and fees are added to the loan balance each month and the balance grows. With a reverse mortgage loan, homeowners are required to pay property taxes and homeowners insurance, use the property as their principal residence, and keep their house in good condition.
Just like with a traditional mortgage, there are closing costs associated with a reverse mortgage. These closing costs may include a loan origination fee, an appraisal, a title search and insurance, surveys, inspections, recording fees, and other fees. Sometimes these costs can be financed into the loan.
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.
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.
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.
A borrower with a reverse mortgage must continue to pay property taxes, maintain homeowner's insurance for the property, and keep the house in good condition.
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.
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.
That's because reverse mortgage lenders factor your life expectancy into the equation. At age 65, with a life expectancy of 85, lenders anticipate your balance could grow for 20 years. Based on this, older borrowers can take advantage of more equity and a higher loan amount.
Reverse mortgages were created specifically to allow seniors to live in their home for the rest of their lives. Because the homeowner typically receives payments from a reverse mortgage—instead of making payments to a lender—the homeowner can never be evicted or foreclosed upon for non-payment.
Legally, heirs have 30 days to respond after being notified that the loan is due. However, if the estate is in probate or needs time to sell, the lender will often grant up to 6 months, with extensions up to 12 months in some cases — as long as: The property is actively being sold.
What are the other upfront costs of reverse mortgages?
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.