In TV commercials, pitchman Tom Selleck hawks the virtues of reverse mortgages. But are they a lifeline for retirees, or a hoax?

The truth is complicated and nuanced.

An Unsavory Reputation
“Reverse mortgages are viewed much more positively by economists than by advisors,” said Michael Finke, Frank M. Engle chair of economic security at The American College of Financial Services in King of Prussia, Penn.

In fact, few advisors even want to talk about them. Since their introduction in the early 1960s, they have developed an unsavory reputation.

In 1989, to rein in unscrupulous lenders who fleeced unsuspecting senior citizens out of their homes, the federal government stepped in. The Federal Housing Administration (FHA), an agency of the Department of Housing and Urban Development, began offering what are called Home Equity Conversion Mortgages (HECMs). Lenders, borrowers, properties, and terms must meet federal approval. Today these are the most popular form of reverse mortgage.

Over the years, the federal safeguards have been strengthened. Since 2014, borrowers must undergo a financial assessment before being approved. Non-borrowing spouses are able to keep living at home even after the borrower has left or died. In addition, 24 states and the District of Columbia have their own reverse-mortgage laws that either reinforce or expand the federal regulations.

“Today,  reverse mortgages are a safe, transparent, and versatile personal financial management tool,” said Steve Irwin, president of National Reverse Mortgage Lenders Association (NRMLA) in Washington, D.C.

Yet others aren't so sure.

The Basics
In general, reverse mortgages are for people who are at least 62 years old (though there are exceptions) and have sizable equity in their home. Most borrowers have already paid off their mortgage, or nearly have.

By borrowing against their home equity, they can receive a tax-free loan—either a lump sum, a fixed monthly amount, or a line of credit—that does not have to be paid back at a specific time, unlike a typical home equity loan or home equity line of credit. Reverse mortgage can be repaid at leisure—at the very latest when the borrower moves out, sells the home, or dies.

But there are a few “catches.”

Not all homes or borrowers qualify. Eligibility depends on many factors, including age, financial responsibility, and debt levels.

Borrowers must stay in the home and maintain its upkeep, including paying for insurance and all taxes. Otherwise, the lender can foreclose.

Loan amounts are set by the lender, not the borrower. Typically, the older you are the more you can borrow. Loan amounts can never exceed the home’s value. If the home happens to depreciate later, through no fault of the borrower, the borrower or borrower’s estate can’t be held responsible to make up the difference; the current value of the home when the borrower leaves or dies must be considered sufficient to pay back the debt.

Also, the income from reverse mortgages counts against eligibility for Medicaid and SSI (Supplemental Security Income).

Three Types
Broadly speaking, there are three types of reverse mortgage.

HECMs are the most common type. They tend to carry the lowest interest rates and the most governmental oversight. They do have some drawbacks, though. Borrowers must be at least 62 years old and must pay mortgage insurance premiums—an initial charge of 2% of the loan amount and 0.5% of the remaining balance every year thereafter—on top of other charges that all reverse mortgages face.

Borrowers can’t be delinquent on any federal debts and must demonstrate that they have sufficient financial resources to maintain the property and pay all related taxes, insurance, and homeowners association fees until the loan is paid off. They also must participate in a government-approved counseling session to be sure they fully understand what they’re doing and know about alternatives.

HECMs strictly limit how much money anyone can receive. For 2023, the maximum is $1,089,300, which is a 12.2% increase from the previous year.

Proprietary Reverse Mortgages
If you want to borrow more, consider a proprietary reverse mortgage, sometimes called a jumbo reverse mortgage. These are loans from a private lender and are not federally guaranteed, though some states regulate them, too.

Proprietary reverse mortgages tend to have higher interest rates and fees than HECMs, but lenders “will consider up to $10 million of any home’s value, [and] some carry a minimum qualifying age as low as 55,” said NRMLA’s Irwin.

In addition, he said, proprietary reverse mortgages may be all that’s available for those whose properties don’t qualify for HECMs—such as certain condominiums that aren’t FHA approved.

Single-Purpose Reverse Mortgage
A third option is a single-purpose reverse mortgage. Though not available everywhere, it’s typically the least expensive choice, in terms of fees and interest. Backed by state, local, and nonprofit agencies, these loans must be used exclusively for a specific and preapproved purpose, such as property taxes or home repairs.

The Case For Reverse Mortgages
Professor Finke at The American College argues that reverse mortgages can be key to a happy retirement. “Failing to tap home equity means leaving joy on the table for a retiree who doesn’t have a strong desire to leave wealth to others,” he said.

Reverse mortgages can supplement Social Security, so retirees don’t have to take aggressive withdrawals from their portfolios and potentially reduce future gains.

Or the funds can be used for emergencies, even for long-term care, so borrowers don’t have to “burn through their remaining retirement funds,” as Kevin Lao, owner and a financial planner at Imagine Financial Security in Jacksonville, Fla., put it.

In short, reverse mortgages “provide an opportunity to diversify a portfolio and help ensure against overdrawing existing retirement assets,” said Irwin.

Another type of FHA-backed reverse mortgage, called a HECM for purchase, can even be used to buy a new home—as long as it becomes the borrower’s primary residence within 60 days of closing.

The Case Against
But others are dubious. “We consider reverse mortgages to be an arrow in the quiver, but not the first one we would pull out,” said Brian Leslie, director of financial planning at Edelman Financial Engines in Omaha, Neb. “Too often, folks are considering reverse mortgages because they aren’t willing to address the root of the problem, which is they aren’t on a sustainable spending path.”

Clients who don’t exercise good spending discipline are likely to spend through the proceeds of a reverse mortgage, he said, “and find themselves struggling to keep up with the upkeep, taxes, and insurance.”

Even the best of these loans carry high fees, he added, citing origination fees, closing costs, title insurance, recording charges, and possibly a monthly service fee. What’s more, once you receive funds, interest charges are compounded. “[This] means the amount you owe grows over time,” he said, and the interest isn’t tax-deductible as it is with a regular mortgage or home equity loan.

Moreover, if the borrower becomes unable to maintain the home, or simply needs to leave it at length for long-term care in a nursing home, say, the home could be seized. Any loved ones who aren’t co-borrowers but are still living there “can end up homeless,” he cautioned.

Others point out that most reverse mortgages aren’t paid off during the borrower’s lifetime, so chances are “the bank will take possession … often just 90 days after [the borrower’s] death,” said Elliot Dole, an advanced planning adviser at Buckingham Strategic Wealth in St. Louis. “Are most families equipped to get everything out of grandma’s house in a few months?”

Best Case Scenario
Wade Pfau, Dallas-based author of the Retirement Planning Guidebook, contends that reverse mortgages are “best used as part of a responsible plan, and not as a last resort.”

Taking out a HECM early in retirement, he said, rather than after money runs out, allows borrowers “more comfort with investing other assets in a relatively aggressive manner.” Plus, he said, a HECM line of credit can be tapped “after down-market years,” so retirees aren’t forced to sell other assets at depressed levels just to make ends meet.