Reverse mortgages are regularly marketed to seniors as a solution for those who want to use equity in their homes as a source of retirement income. An alternative to home equity loans or home equity lines of credit (HELOCs), reverse mortgages work very differently than a typical home loan. 

When you take out a reverse mortgage, you receive either a lump sum payment, a fixed monthly payment for a set time, or a fixed monthly payment for the duration of the time you’re in the home. You continue living in the house and must maintain it and pay taxes and insurance, but you don’t have to make mortgage payments. Instead, your loan is repaid from the home’s equity when you sell or pass away.

Reverse mortgages make good sense in certain situations, especially those from the best reverse mortgage companies. With many seniors struggling with high costs — even as inflation cools and interest rates begin to fall — a growing number of retirees could potentially benefit from a reverse mortgage. Unfortunately, not all older Americans understand how they work or know how to decide if a reverse mortgage or HELOC is best.

The good news is that learning some key facts about reverse mortgages can help clear up some of this confusion, and provide more insight to seniors on how reverse mortgages work, how they’re paid for, and when to borrow. 

Start exploring the reverse mortgage options available to you here now.

5 important reverse mortgage facts seniors should know

Here are five critical facts to keep in mind for seniors considering a reverse mortgage right now:

You need to be 62 and older

The first key thing to know about reverse mortgages is that only seniors can qualify for them. 

As Lisa Gaffikin, a home loan specialist at Churchill Mortgage explains, “a reverse mortgage is intended for borrowers over age 62.”

While there are some limited options for those 55 and over, they are generally for jumbo or proprietary programs only. With most lenders, the age limit is so strict that those who want a reverse mortgage but who share a home with a younger spouse would need to remove the younger spouse’s name from the title. 

Check your reverse mortgage eligibility online today.

You’ll be limited in how much you can withdraw

With a traditional mortgage, banks decide how much money property owners can borrow based on their debt and income. Things work differently for a reverse mortgage, with Gaffikin explaining that these loans are often available to seniors with limited funds who might be unable to qualify for a home equity loan or HELOC. 

Rather than income or credit scores, lenders set borrowing limits for a reverse mortgage based on age, the interest rate you’re offered on your loan and how much the home is worth. If your home appraises for a high price, if you’re older, or if you qualify for a lower interest rate, you’ll be eligible to borrow more than a younger person or someone whose home isn’t worth as much.

Your loan balance will grow over time

With most mortgage loans, including home equity loans and lines of credit, you make monthly payments and your balance declines over time.

With a reverse mortgage, Gaffikin explains that no monthly payments are necessary, making them an ideal option for those who can’t afford to add another obligation to their plate. However, there are consequences to borrowing and not repaying your loan for years or even decades. 

“Unlike a traditional forward mortgage, the loan balance grows over time as interest accrues,” explained Josh Lewis, Certified Mortgage Consultant at The Educated Homebuyer. “This will reduce the equity in the home for your heirs to inherit.”

While Lewis explained that “you will still own your home and leave it to your family as part of your estate,” your loan balance will have grown with years of unpaid interest. Your heirs will need to be able to pay the amount you initially borrowed, plus interest that accrued, either by selling the home or taking out a mortgage of their own to cover the costs. 

The good news is, there is some protection against owing too much. “The non-recourse feature ensures neither the borrower nor the heirs will owe more than the home is worth at the time is it sold,” explained Neil Christiansen, a Colorado-based Home Loan Specialist for Churchill Mortgage. 

You must fulfill your responsibilities as a homeowner

It’s critical for every senior who takes out a reverse mortgage to understand that this loan comes with responsibilities that must be fulfilled. 

“You will still be responsible for paying your property taxes, insurance, and home maintenance,” Lewis explained. “Many seniors don’t realize that failing to do so can lead to foreclosure, even with a reverse mortgage. Improvements to the program in recent years require lenders to confirm your financial ability to pay for these items but it’s an important consideration.”

If you don’t keep up with home maintenance or you miss tax, HOA or insurance bills, the lender will move to take your home. You could also face foreclosure if you don’t live in the home for 12 or more months. 

You could face higher costs

Finally, it’s worth noting that reverse mortgages may not come with monthly payments, but that doesn’t always mean they’re affordable in the long run. 

“While a reverse mortgage can be a great option, interest rates are typically higher than traditional mortgages, and upfront costs can be significant,” explained Lewis. “Make sure you understand all costs and compare them with other options like a home equity line of credit.”

Seniors interested in a reverse mortgage can help keep their loan reasonable by shopping around carefully to find the right lender. Paying higher costs also may be worthwhile if a reverse mortgage is the only affordable way to tap into equity. 

As Gaffikin pointed out, these types of loans can make it possible to stay in your home and lower your monthly obligations — and they’re available even if you have too little cash flow to qualify for a traditional home equity loan or line of credit. 

If you do have the money to make monthly payments and want to tap equity, you should consider all the alternatives. You may decide making a monthly payment on a home equity loan or line of credit is worth the tradeoff for a more affordable loan with a balance that declines over time rather than increases. 

Ultimately, a lot depends on whether you want to pay the loan costs now or leave them for the next generation — and your financial circumstances while determining which of those options is best for you.