Reverse Mortgage Pitfalls

A reverse mortgage allows elderly people to receive monthly payments or a lump sum by borrowing against the equity in their homes while not having to repay the loan as long as they live in it. There are some pitfalls to consider.


Reverse mortgage loans do eventually need to be repaid back when the borrower moves out or passes on. If the loan cannot be repaid back, the bank sells the home and uses the proceeds to pay off the loan and then the rest of the money goes to the heirs of the borrower. One way of ensuring the home gets passed on to future generations is by taking out a life insurance policy on the borrower to cover the expected balance of the property so that when the borrower passes on, the insurance policy can be used to pay off the loan, allowing the home to get passed on.

Medicaid Effects

Medicaid's eligiblity levels are $2,000 for an individual or $3,000 for a couple in liquid assets. If a borrower that is currently on Medicaid takes the lumpsum option and receives more than the allowed Medicaid amount, the entire lumpsum must be spent right away, or else it could make the person ineligible for Medicaid. We recommend speaking to a financial advisor or a reverse mortgage consultant who can better inform and provide professional advice on the effects of a reverse mortgage on Medicaid.


Even though you are not required to make payments to the lender on a reverse mortgage, homeowners insurance, HOA fees and taxes are still required to be paid. In the past, about 10% of homes are foreclosed upon because seniors don't realize that they still need to budget enough money to pay off the previously mentioned. Many more seniors are becoming more informed and educated on reverse mortgages so experts expect the 10% figure to decline.

The bottom line is a reverse mortgage is a great tool for seniors but one must fully understand some of the pitfalls and reverse mortgage cons/negatives before jumping into it. Contact one of our licensed reverse mortgage agents today.