TV says a reverse mortgage means tax-free cash. What's the catch?

The question

An illustrative letter.

The answer

My dear, I spent my career in mortgage lending, so let me tell you plainly what those cheerful ads leave out. A reverse mortgage can be a useful tool for some people. But it is not free money, and it is not a government benefit. It is a loan against your home, and the details matter enormously.

How does a reverse mortgage work?

The most common kind is the Home Equity Conversion Mortgage, insured by the federal government through HUD. It lets homeowners aged 62 or older borrow against their home's value without making monthly loan payments. You can take the money as a lump sum, monthly payments, a line of credit or a mix. Instead of shrinking as with an ordinary mortgage, the balance grows each month as interest and insurance charges are added.

Generally, the loan is repaid when the last borrower dies, sells the home or moves out, including a move to a care facility for more than a year. The home is usually sold to repay it.

Is the money really tax-free?

Generally yes. Because it is a loan, the money is not counted as taxable income, and according to the Federal Trade Commission, it usually does not affect Social Security or Medicare. It can affect benefits that depend on your income and savings, such as Medicaid, if the money builds up in your accounts. Ask the counselor how it would apply to you.

Can I really lose my home?

Yes, and this is the most important thing the ads leave out. A government study of reverse mortgage advertisements found that many viewers came away believing they could never lose their home. That is a misimpression. You keep the title, but the loan comes with obligations. You must keep paying property taxes and homeowners insurance, keep the home in good repair, and live there as your main home. If you fall behind on taxes or insurance, the lender can call the loan due, and homes have been lost this way.

Living on the Gulf Coast, that insurance obligation deserves special thought. Homeowners insurance costs can rise sharply after storms, and you would need to keep paying them for as long as you have the loan.

What does it cost?

More than many people expect. For a HUD-insured reverse mortgage:

• An upfront mortgage insurance charge of 2 percent of the home's value, up to the 2026 lending limit of $1,249,125.
• An annual mortgage insurance charge of 0.5 percent of the balance, added each year on top of interest.
• An origination fee of up to $6,000, plus closing costs.

The FTC notes that these costs can be higher than other ways of borrowing against a home, such as a home equity loan or line of credit. Because they are usually added to the loan, they grow along with it.

What happens to my children?

When the loan comes due, your heirs can repay it and keep the home, or sell it. Most reverse mortgages are non-recourse, which means neither you nor your estate can owe more than the home is worth when it is sold. Your children would not inherit a debt beyond the house, but they would likely inherit less of the house than if there were no loan.

Why is counseling required?

Because the decision is so important. Before you can take out a HUD-insured reverse mortgage, you must meet with a counselor from a HUD-approved agency, who is independent of the lender. Use that session well. Ask what you would receive, what it would cost over time, what happens if you need to move, and what other options you have. Bring a family member or trusted friend if you like.

What are the alternatives?

Depending on what you need the money for, other options may cost less: a home equity loan or line of credit if you can manage payments, downsizing to a smaller home, local or state property tax relief for older homeowners, or programs that help seniors with repairs or utilities. Your local Area Agency on Aging can tell you what exists near you.

Who should I be wary of?

The FTC warns that some salespeople rush borrowers or push them to buy other financial products, such as annuities, with the money. Take your time, and never let anyone pressure you into signing.

Your house is paid off, my dear, which is a real accomplishment. Before you borrow against it, sit down with a counselor, ask every question, and decide only when you understand exactly what you are trading.

One thing to do this week

Find a HUD-approved reverse mortgage counselor and write down your questions about costs, moving and your other options before you call.