What are the pros and cons of reverse mortgages?

By: HowStuffWorks.com Contributors

Many American seniors are desperate for ways to pad their pensions and Social Security benefits. If you're considering taking on a reverse mortgage because you're strapped for cash, check out information regarding your options and consult reverse mortgage counseling services through the American Association of Retired Persons (AARP).

The benefits of reverse mortgages are substantial. You can tap into your home equity and receive cash payments. The loan only has to be paid back when the last surviving borrower permanently moves out, sells the home or dies. You don't get taxed on your payout and you can still receive your full Social Security and Medicare benefits.


Reverse mortgages have their downside too. Upfront costs are heftier for reverse mortgages than for conventional mortgages and are usually paid out of the home's equity. Real estate taxes and homeowner's insurance will still be your financial responsibility. You'll be obligated to carry expensive mortgage insurance in order to safeguard the lender in the event that the value of your home decreases or if you continue to hold the mortgage for a longer-than-average period of time. If you don't properly maintain the property, the lender is entitled to take it back. Similarly, if you leave for any extended period to stay in a nursing home or hospital, even if your intention is to return to your home, you can be required to repay the entire balance of the loan plus interest. Lastly, the interest on your debt with a reverse mortgage accrues with time and the increase compounds. This means that the equity of your house decreases at the same rate. When you move out permanently or die, the entire loan balance will have to be repaid, up to a maximum of the home's appraised value when it is sold.