What is a disadvantage of reverse mortgages?

A reverse mortgage is a financial product that allows homeowners, typically older adults, to convert a portion of their home equity into cash. One of the significant disadvantages of reverse mortgages is that the loan balance can exceed the home's value. This can occur because, unlike traditional loans where borrowers make monthly payments, with a reverse mortgage, the loan balance grows over time due to accrued interest and fees.

As homeowners receive payments from the lender while still living in the home, the amount borrowed increases until the homeowners either sell the home, move out, or pass away. If the market value of the home declines or if the homeowner lives longer than expected, the amount owed can surpass the value of the home itself. This scenario is concerning for homeowners and their heirs, as it could leave them with no equity left in the home after the loan is repaid.

The concern is mitigated by non-recourse protections in many reverse mortgage agreements, meaning the lender cannot seek repayment beyond the value of the home itself. However, the potential for the loan balance to exceed the home's value is a critical disadvantage that borrowers should consider before opting for this type of financing.