With high mortgage rates and home prices not much better, downsizing isn’t very attractive to many older homeowners these days. Instead, reverse mortgages — which allow you to turn your existing home equity into cash — can start to seem pretty tempting.

“Reverse mortgage demand is rising, driven by an aging population, strong home values, and seniors’ preference to age in place rather than rely on care facilities or family,” says June Lu, branch manager at Churchill Mortgage. 

But reverse mortgages have unique risks of their own, and it’s important to weigh these carefully before taking one out, especially with today’s housing market conditions.

Compare your reverse mortgage loan options and find the right fit today.

Are reverse mortgages too risky in this housing market? Here’s what experts say

Exactly what risks do reverse mortgage borrowers face in the current market? And is taking one out a smart move for you or your family members right now? Here’s what experts say you should consider. 

Insurance, maintenance and property taxes are rising

You don’t have to make monthly payments on reverse mortgages, but you do have some responsibilities to your lender. Namely? You must maintain your home, always have a valid home insurance policy in place, and keep up on your property taxes. 

If you don’t do one of these things? “It’s a serious issue that can lead to foreclosure,” says Chuck Czajka, founder of financial advisory firm Macro Money Concepts.

Unfortunately, all of these costs are rising, making it hard for many homeowners to stay current on what’s owed. Home maintenance costs now average almost $10,600 — a jump of 5% in just the last year, according to home services platform Thumbtack, and property taxes are up 15% since pre-pandemic days. Thanks to increasing natural disasters and rising labor and material costs, home insurance premiums are soaring, too, jumping 24% in just the last three years alone. 

If you’re worried about affording these items but still want to take out a reverse mortgage, a “Life Expectancy Set-Aside” account (LESA) might be able to help. 

“It’s essentially a reserve account that holds funds from the loan to cover future property charges,” Lu says. “This ensures there is money set aside to keep the home in good standing and avoid default.”

Learn more about how a reverse mortgage could help you cover your costs in retirement.

Home prices are falling in some areas

Another consideration — not necessarily a risk, though — is that home prices are starting to fall in some areas. For example, in Austin, Texas, home prices are down about 5% over the last year. 

This has a two-fold impact on reverse mortgages. First, it reduces how much equity you have to tap. 

“Slowing or declining home prices directly impact the amount a borrower can qualify for, since loan proceeds are based on the appraised value,” Lu says. “This means retirees may have less cash available to tap into.”

It can also make qualifying for the loan more difficult or even impossible in some cases. 

“In areas with steep declines in home values, seniors may not be able to qualify for the loan due to an insufficient equity position,” Lu says.

Fortunately, if you already have a reverse mortgage in place when your home values decline, it will never mean owing more on the home than you borrowed, as long as you have the government-backed version of these loans, called a Home Equity Conversion Mortgage (HECM). With HECMs, there is a non-resource clause stating you will only owe what your home is worth — never more — when your reserve mortgage eventually comes due.

“There are protections in place to protect the borrower and the lender,” says Richard Stewart, a reverse mortgage specialist at CrossCountry Mortgage. “The loan is due when the borrower is no longer living in the home. If, at that time, the loan balance is higher than the actual value of the home, the seller can never owe any money, as the mortgage insurance funds absorb the negative balance.”

You may leave less to your heirs

With equity potentially falling in many areas, taking out a reverse mortgage can only further deplete the stake you have in the home, and what you can pass on to your loved ones when you die. 

“The main consideration to take into account with a reverse mortgage is its impact on what you leave to your heirs,” Lu says. “Since the loan draws from your home’s equity, there’s no guarantee that much — or any — equity will remain once you pass.”

Stewart says this is particularly true if you choose not to make payments on your reverse mortgage loan.

In this case, Stewart says, “The loan balance will grow and, as such, eat away at the equity.  I advise prospective borrowers that if they are passionate about leaving a big equity check for their heirs, then a reverse mortgage may not be the right decision.”

Your costs could outweigh your benefits

Another factor in whether a reverse mortgage is smart right now is how long you plan to stay put. That’s because reverse mortgages will come due when you sell the home, die or move out permanently (to a new home or even to a nursing facility, for example). If you don’t plan to be there very long, the upfront costs of taking out a reverse mortgage may not be worth it.

“Reverse mortgages have higher upfront fees than traditional loans,” Czajka says. “Origination fees can be excessive.”

Today’s rising interest rates can also make reverse mortgages expensive for some borrowers.

“Many reverse mortgages have variable interest rates tied to some market indexes,” Czajka says. “In a high inflation environment, the rate can increase on a reverse mortgage.”

To make the most of a reverse mortgage and ensure the costs are worth it, experts say you need to stay in the home for a while, ideally several years or more.

“If they don’t plan to stay in the home for more than a couple of years, I’ll often advise them against a reverse,” Stewart says. “Like any mortgage, there are closing costs, and paying them doesn’t make a lot of sense if they don’t plan on staying in the home long enough to benefit from the reverse mortgage.”

Alternatives to reverse mortgages

As with any financial product, there are risks to reverse mortgages. But if you plan to stay in the home awhile, have a good amount of equity, and aren’t too concerned about leaving behind a big inheritance for family members, a reverse mortgage can be a good option in today’s climate. 

And remember: They aren’t your only option for turning your equity into cash. You can also consider a home equity loan, home equity line of credit (HELOC), a cash-out refinance, or in some cases, selling your house and moving into a rental property can be a good option.

“Many seniors today are choosing to sell their homes, move to more affordable rentals, and invest the proceeds to generate income,” Lu says. “Renting also avoids ongoing maintenance and property expenses.”

The bottom line

When weighing a reverse mortgage, it’s crucial to balance the potential benefits against the costs and long-term impacts. For homeowners who plan to stay put for several years, have substantial equity and aren’t overly concerned about leaving a large inheritance, tapping into home equity through a reverse mortgage can provide a meaningful financial cushion. But rising property costs, variable interest rates and upfront fees mean the decision isn’t one to take lightly.

For those unsure if a reverse mortgage is right, the alternatives may offer more flexibility. And in some cases, selling the home and renting elsewhere can reduce expenses while freeing up cash for retirement. The key is to carefully assess your timeline, your home’s value and your financial goals to ensure that whichever path you choose, it supports both your present needs and your long-term security.