You can boost your retirement income with this special type of mortgage — but is it worth the risk?

How do reverse mortgages work?

Reverse mortgages are available only to homeowners who are 62 or older. These loans allow seniors to access their home equity in the form of a lump sum paid, steady monthly payments or both. The maximum loan amount is based upon the homeowner’s available equity.

Unlike with a traditional mortgage, reverse mortgages typically don’t require monthly payments. However, borrowers must still maintain the property by covering costs like property taxes, homeowners insurance, HOA fees and repairs. Additionally, interest is charged monthly on the borrowed amount, compounding over time.

As the interest accrues, it reduces the homeowner’s remaining equity. Over time, seniors own less of their home and more to the lender. When you move, sell or die, the entire amount due has to be paid back.

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Is a reverse mortgage worth it?

There is an undeniable benefit to a reverse mortgage. They provide seniors with financial relief by allowing them to access their equity while remaining in their home. This can be helpful for those who are house-rich but cash-poor.

Moreover, since reverse mortgages payouts don’t add a monthly payment to the borrower’s expenses, they’re an attractive option for seniors already facing financial challenges. The funds are typically tax-free and don’t impact Social Security benefits, further increasing their appeal.

Unfortunately, though, there are some huge downsides including:

• Costs and fees: Reverse mortgages are often more expensive than traditional loans, with higher interest rates and additional fees.
• Upselling risks: The Federal Trade Commission warns that some reverse mortgage providers also try to convince seniors to buy other financial products with the money they get from the loan. These products may not be in their best interests.
• Declining equity: As interest accrues, the homeowner’s equity decreases. This can leave borrowers with little ownership stake in their home, which can complicate future plans. For example, selling the home may leave minimal proceeds and large loan balances can make it difficult for a spouse or heirs to retain the property after the borrower’s death.

Before committing to a reverse mortgage, you need to be sure you understand these serious disadvantages. You should consider alternatives, such as downsizing to a less expensive property to cash in your equity. You'll also want to be 100% sure you know all the costs you're taking on and avoid rushing into a loan without fully understanding the risks.