Reverse mortgages can be helpful tools, but they’re not without risks. Some common traps have caught seniors off guard, leading to financial stress.
If you’re thinking about taking out a reverse mortgage, it’s important to understand the risks. Here's a simple breakdown of the biggest reverse mortgage traps to avoid — and why knowing them can protect your home, your finances and your peace of mind.
1. Not Realizing You’re Still Responsible for Taxes and Insurance
One of the most common misconceptions is that a reverse mortgage means you don’t have to worry about anything related to your home anymore. That’s not true. You’re still responsible for paying property taxes, homeowner’s insurance and maintaining the home. If you fall behind on any of these, the lender can foreclose — even if you’ve been living in your home for decades.
2. Assuming You’ll Never Lose Your Home
A reverse mortgage lets you stay in your home — as long as it’s your primary residence. If you move into a nursing home, live elsewhere for more than 12 months or pass away, the loan becomes due. If no one pays it off, your home can be sold to cover the balance, which could leave your heirs with nothing.
3. Not Understanding the Fees
Reverse mortgages come with a stack of fees: closing costs, mortgage insurance premiums, origination fees and servicing fees. These are often rolled into the loan, which means you’re paying interest on them, too. It adds up quickly and reduces the equity left in your home.
4. Borrowing Too Early
Taking out a reverse mortgage as soon as you turn 62 (the minimum age) might sound tempting, but it can backfire. The younger you are, the less money you qualify for and the longer you’ll need the loan to last. Waiting a few years — if possible — can give you access to more funds and lower the risk of outliving your money.
5. Choosing the Wrong Payout Option
Reverse mortgages offer several payout options: lump sum, monthly payments or a line of credit. A lump sum might feel like a windfall, but it can disappear fast — especially if you don’t have a budget. For many seniors, a line of credit or monthly payments offer more stability and help the money last longer.
6. Not Involving Family Members
Many seniors take out a reverse mortgage without telling their adult children or heirs. This can lead to surprises down the road, especially if the family expected to inherit the home. It’s wise to involve trusted family members or financial advisors early in the process so everyone is on the same page.
7. Falling for Scams
Sadly, reverse mortgage scams target seniors every year. Watch out for anyone pushing you to take a reverse mortgage to invest in something, buy insurance or give them access to the money. Only work with HUD-approved lenders and never sign anything you don’t fully understand.
8. Ignoring the Impact on Government Benefits
While reverse mortgage payments don’t count as taxable income, they can affect eligibility for need-based programs like Medicaid or Supplemental Security Income (SSI). If you suddenly receive a large lump sum, it could disqualify you. Always check with a financial advisor or benefits specialist.
If you're considering a reverse mortgage, take your time. Do your research, talk to a HUD-approved counselor and bring a trusted friend or family member into the conversation. With the right guidance, you can make a decision that truly supports your retirement goals — without sacrificing the roof over your head.