As good as a reverse mortgage may initially sound, it’s crucial that you fully understand the potential downsides involved. It’s so important in fact, that government-backed reverse mortgage programs actually require you to go through a counseling process to ensure you make an informed decision.

That’s not to say that reverse mortgages aren’t the right move. Just to the contrary, they’re lifesavers that provide financial breathing room for many. It’s just that, in the wrong situations, they can make an already bad situation even worse. So, take a look at this breakdown of the major risks associated with a reverse mortgage, before you decide to go any further.

Reverse Mortgage Con #1 The Upfront Cost
There’s no doubt that the biggest reverse mortgage con is the upfront fees that you’ll pay to get the loan. It’s not uncommon for these fees, (which include the lender’s origination fee, a FHA insurance premium, and administrative costs) to average 5% of your home’s value. That means that a reverse mortgage on a $200,000 home could potentially cost you $10,000 out of pocket.

In deciding if the upfront fees on a reverse mortgage are excessive, it’s important to think in terms of spreading the cost over the length of your loan. In other words, if you think you’re likely to keep a reverse mortgage that pays you $600 per month for 20 years, you’d be paying $10,000 upfront to borrow $144,000 (not counting interest). However, if you think there’s a possibility of only utilizing that reverse mortgage for 5 years, you’d be paying $10,000 to borrow just $36,000. That’s a big swing in the relative costs between the two reverse mortgages.

Reverse Mortgage Con #2 If You Die, Your Kids May Not Get Your Home
In this day and age, no legitimate reverse mortgage lender swoops in and sells your home without the consent of your heirs. But, when you die, your heirs will still face a dilemma about what to do with the balance due on your home.

They essentially have three choices. First, the can come up with outside funds to pay off the balance. This may not be so hard if the reverse mortgage has only been in place for a few years or you have affluent children. But, if you’re carrying a six-figure reverse mortgage balance, it may be impossible.

Second, they can refinance the home with a traditional forward mortgage and begin making payments on the balance. While that might sound like the most likely step, you have to keep in mind that there’s no guarantee that your kids will be able to qualify for a mortgage, especially if they already own one home. This situation could easily be made worse by an ongoing financial crisis that limits the availability of new credit and mortgages.

Lastly, your heirs can sell the home and use the proceeds to pay off the loan balance. Any profits left above the loan amount would belong to your heirs. Since many heirs do not have enough cash to pay off the loan balance and they cannot or will not be able to take on an additional loan, unfortunately this third option seems to be the most common. Thus, if it is important to you for a home to stay in your family, there’s a good chance a reverse mortgage isn’t right for you.

Reverse Mortgage Con #3 Medicaid and Supplemental Social Security
The monthly payments you receive from a reverse mortgage can actually hurt your eligibility for Medicaid (not Medicare) and Supplemental Social Security (not regular Social Security). Ironically, your home equity by itself does not affect your eligibility for these programs - it’s only when you turn it into a stream of payments.

If you depend or think there’s a chance you’ll need to use these programs in retirement, you’ll want to pay a visit to your local Medicaid and Social Security office for expert advice. Be sure to bring an estimate of your monthly reverse mortgage disbursement, so that a representative can provide you with an estimate of how much you’ll actually be affected, if at all.