Boyce Watkins, a writer and finance professor at Syracuse University, says one often neglected aspect, and downside, of reverse mortgages can be the emotional impact.

“You’re facing your own mortality,” Watkins says. In addition, reverse mortgages affect where the homeowners live, how medical bills will be paid and what the future holds inasmuch as financial security is concerned. Most adults nurture the idea of leaving something to their children and believe their home is sacrosanct. Parting with even a little of its value can be traumatic.

Watkins sees reverse mortgages as similar to secured credit cards. “It looks a lot like free money, and a lot of people miss the fine print,” Watkins says. “Many customers only pay attention to two or three variables in a loan.”

Depending on where you live, Basich says, the proceeds from a reverse loan could prove a barrier to qualifying for Medicaid, which counts loan proceeds as an asset.

Although each state differs in the fine print, untapped equity in the home is not considered an asset in determining Medicaid eligibility, as long as it’s owner-occupied. Recent federal legislation placed the home-exemption ceiling at $500,000.

For a homeowner with property worth more, there’s definitely an argument for obtaining a reverse mortgage and then spending down the cash. But that cash is also subject to Medicaid’s new time limitations on asset reduction. Talk to an eligibility specialist early in the process to see where you stand.

Additionally, Basich says, the terms of many reverse mortgages knock homeowners out of their homes after a period of absence, which varies from lender to lender. He says some reverse mortgages require the full loan balance plus accrued interest be repaid when the house is vacated by the owner for a specified period — like a prolonged, but temporary, nursing-home visit.

“Can you imagine if you have nowhere to go to?” Basich says. “What incentive do you have to get better?”

Basich believes seniors should consider borrowing against the value of their homes only as a last resort. If there’s no way around it, he says it’s smarter to refinance as a 30-year fixed loan.

Here’s how that would work: You own a home valued at $300,000. You find yourself in need of a large amount of cash for major home repairs and want a lump sum in the bank for future emergencies. You borrow a combination of cash and upfront costs (rolled into the loan) valued at $100,000 at 6%. Exclusive of taxes and insurance, you’d be repaying a little less than $600 per month on a 30-year loan. You wouldn’t need mortgage insurance because you’d still have plenty of unencumbered equity.
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The rub here is the monthly payments. However, Basich contends that the fees for this type of loan are lower, and your remaining equity isn’t subject to interest or other costs associated with a reverse mortgage.

True, in a conventional mortgage, the money must be paid back starting right after closing, while reverse mortgages don’t fall due until the home is vacated. But, Basich argues, because the payments on a conventional mortgage are stretched out over a longer period, they’re lower and more manageable.

In the case of a reverse mortgage, younger borrowers can’t cash out as much equity as older borrowers. To qualify for a reverse mortgage, you must be at least 62 years old. Because banks are repaid when the house is sold, it’s quite possible a lender might have to carry the note for 20 to 25 years or more. For that reason, a 79-year-old is a much more attractive loan candidate from the bank’s perspective.

As for the borrower, whether he lives six months or 30 years after the loan is closed, he still pays stiff upfront fees. Of course, statistically speaking, older borrowers are less likely to accumulate as much interest as younger ones.