The borrower (homeowner) is responsible for paying property taxes, homeowners insurance, and maintenance costs on a home with a reverse mortgage. Because the borrower retains the title to the home, these obligations do not transfer to the lender. Failure to pay these taxes can lead to foreclosure.
Property Taxes and Insurance
Reverse mortgage proceeds are non-taxable, but the borrower still has the obligation to pay property taxes and homeowners insurance in a reverse mortgage. If these are not kept up to date, the lender can, in fact, initiate foreclosure proceedings in order to recover the loan balance.
No, reverse mortgage payments aren't taxable. Reverse mortgage payments are considered loan proceeds and not income. The lender pays you, the borrower, loan proceeds (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home.
In a reverse mortgage, you remain the legal owner of your home, keeping the title and deed in your name; the lender places a lien on the property as security for the loan, but never takes ownership, meaning you can live there as long as you pay taxes, insurance, and maintain the property. The loan is repaid when you sell, move out, or pass away, typically through the home's sale by you or your heirs.
If you decide to sell your home while you have a reverse mortgage loan, you will have to pay back the money you borrowed plus interest and fees. If your loan balance is less than the amount you sell your home for, then you keep the difference.
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.
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.
The "6-month rule" for reverse mortgages refers to the general timeframe the loan becomes due when the borrower moves out or passes away, giving heirs about six months to repay the loan or sell the home, with possible 90-day extensions (totaling up to 12 months) to resolve the debt, but it also means borrowers must live in the home for at least six months a year or risk the loan maturing if away too long for non-medical reasons, according to CFPB and Investopedia.
Social Security isn't typically affected by a reverse mortgage loan because it is a government-based program, primarily based on contributions you and/or your spouse made during your years in the workforce.
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.
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.
Your lender pays for homeowners' insurance through escrow, but not property taxes. You opt out of escrow and choose to pay taxes and insurance directly. In some cases, you may need to have a certain amount of equity in the home for some mortgage institutions to be eligible.
While a reverse mortgage lets you access your equity without selling your house right away, it can be financially risky: A reverse mortgage increases your debt and can use up your equity. While the amount is based on your equity, you're still borrowing the money and paying the lender a fee and interest.
A 15-year fixed-rate conventional mortgage is the only kind of loan we ever recommend at Ramsey. It keeps you on track to pay off your house fast and has the lowest total cost.
As long as at least one borrower lives in the home and meets the loan requirements (taxes, insurance, and maintenance), the reverse mortgage can last indefinitely.
Yes, inheriting a house with a reverse mortgage is possible. If a loved one decides to take out a reverse mortgage on the home, and then chooses you as the heir to that home, then you would inherit the home with the reverse mortgage on it.
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.
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.