As opposed to a traditional mortgage where you pay the bank, with a reverse mortgage, the bank pays you. However, banks charge a hefty amount of interest for the privilege. Even though the borrower doesn't have to pay the loan back as long as she remains in the home, when the loan does become due -- after she passes away, for example -- the heirs must pick up the tab. In addition to the accrued interest, reverse mortgages come with expensive closing costs and service fees, and they require insurance. Up-front costs alone can be more than 10 percent of the loan, according to Walter Updegrave, "Money" magazine's senior editor. Jon Beyrer, a California financial planner, told SmartMoney that people should only tap a home's equity as a last resort.
Some mortgage lenders try to get reverse mortgage applicants to buy additional, yet unnecessary, products as part of the loan package. At one time, it was quite common for lenders to push deferred annuities, insurance products that come with high fees and tie up the borrower's cash, on senior citizens. Borrowers who get their loans through the U.S. Department of Housing and Urban Development don't have to worry about this scam, because HUD now prohibits lenders from tying additional products to the reverse mortgage. Not all reverse mortgages are from HUD, although the vast majority of them are.
Maintaining the Home
Once a borrower takes out a reverse mortgage, he must maintain the home. This could prove to be financially or physically difficult for some folks. A house large enough for a family might be difficult for an aging person to maintain. In addition, property taxes are so high in some areas, for example, that people cannot afford to pay them.
Forced to Leave
One of the rules of a reverse mortgage is that the borrower must live in the home and cannot be out of the home for more than a year. If the borrower has an accident or illness that requires hospitalization and then recovery time in a nursing home, for example, the borrower could exceed the year's limit, and the reverse mortgage becomes due. In many cases, that forces the borrower to sell the home. If the housing market is down, that could prove difficult to do. A person in this situation without a reverse mortgage could keep the house or could even rent it out while in the nursing home.