For elderly homeowners, a reverse mortgage might increase the money available for retirement spending. With a reverse mortgage, you get money from a bank and you don’t need to pay it back.
However, lenders providing reverse mortgages may charge upfront fees ranging from 4 percent-8 percent of the loan amount. Many borrowers choose not to pay those fees, which are then added to the loan balance. Compound interest will be charged on the entire amount.
Suppose that Ellen Baker is a widow living in her house. If she takes out a $200,000 reverse mortgage and chooses not to pay the upfront fees, she might start out paying interest on a loan of $210,000 or more. All the unpaid interest will keep compounding until the loan is due, typically when Ellen dies or moves out of the house.
Generally, the house will have to be sold to repay the loan. The larger the loan balance, including compound interest, the less that will be left for Ellen and her heirs.