The Pros, The Cons, and The Estate Planning Dangers
If you are a homeowner in New York over the age of 62, you have likely seen the commercials. A celebrity spokesperson promises a way to “live tax-free” in your home, pay off your debts, and enjoy your retirement by unlocking your home’s equity. This product is the Home Equity Conversion Mortgage (HECM), commonly known as a Reverse Mortgage.
As a New York estate planning attorney with over 30 years of experience, I approach these financial products not as a salesperson, but as a protector of your legacy. I am Russel Morgan, and at Morgan Legal Group, we have counseled thousands of families on how to preserve their assets.
In 2025, with property values in NYC and Long Island at historic highs, a reverse mortgage is tempting. It offers liquidity. But it comes with significant, often hidden, risks to your estate plan and your Medicaid eligibility. This guide cuts through the marketing hype to give you the legal reality: the good, the bad, and the specific dangers to your heirs.
What is a Reverse Mortgage? (The Basics)
A reverse mortgage is a loan available to homeowners aged 62 or older. It allows you to convert part of the equity in your home into cash.
- No Monthly Payments: Unlike a traditional mortgage or HELOC, you do not make monthly payments to the bank.
- The Bank Pays You: You can receive the money as a lump sum, a monthly payment, or a line of credit.
- Repayment: The loan (plus accumulated interest) is generally not repaid until the last surviving borrower dies, sells the home, or permanently moves out.
It sounds perfect. But in the world of finance and law, there is no such thing as free money.
The Pros: Why New Yorkers Use Them
There are valid reasons to use this tool, especially in a high-cost-of-living area like New York.
1. Aging in Place
For a senior with a $1.2 million home in Queens but a small Social Security check, the property taxes and maintenance can be overwhelming. A reverse mortgage provides the cash flow to pay these bills, allowing the senior to stay in their beloved home rather than downsizing or renting.
2. Paying Off Existing Debts
If you still have a traditional mortgage in retirement, the monthly payments can eat up your income. A reverse mortgage can pay off the existing mortgage, eliminating that monthly bill and freeing up cash for food and medicine.
3. Tax-Free Cash Flow
The money you receive is loan proceeds, not income. Therefore, it is generally not subject to income tax. This can be helpful for seniors trying to manage their tax brackets.
The Cons: The Price You Pay
The costs of a reverse mortgage are notoriously high. This is where the “sales pitch” often glosses over the details.
1. High Upfront Costs
Origination fees, mortgage insurance premiums (MIP), and closing costs can be substantial. On a high-value New York home, you might pay $15,000 to $25,000 just to *open* the loan. This eats into your equity immediately.
2. Compound Interest Eats Equity
Because you are not making payments, the interest is added to the loan balance every month. The interest compounds. Over 10 or 15 years, the loan balance can grow explosively, often consuming 50% to 90% of the home’s equity. This means there is significantly less (or nothing) left for your heirs.
The Estate Planning Dangers: What Your Heirs Need to Know
This is the area where our firm sees the most tragedy. A reverse mortgage complicates your estate plan significantly.
Danger #1: The “Move-Out” Trap (Nursing Homes)
This is the most critical risk for seniors. A reverse mortgage becomes due and payable in full if the borrower ceases to use the property as their “principal residence” for 12 consecutive months.
The Scenario: You have a stroke and go into a rehab facility. Complications arise, and you stay in a nursing home for 13 months.
The Consequence: The bank calls the loan. You must pay back the *entire* balance immediately, or the bank forecloses. You are forced to sell your home while you are sick in a nursing home. This defeats the purpose of “aging in place.”
Danger #2: The Inheritance Headache
When you die, your heirs do not just “get the house.” They inherit the house *and* the reverse mortgage debt. They usually have 6 months (with potential extensions) to:
- Pay off the loan in full (usually by getting a new mortgage).
- Sell the house and pay off the loan from the proceeds.
- Deed the house to the bank (Deed in Lieu of Foreclosure) if they don’t want it.
If your children wanted to keep the family home, they might not qualify for a mortgage to pay off your reverse loan. We have seen families forced to sell the home they grew up in because they couldn’t bridge the financing gap.
Danger #3: The Non-Borrowing Spouse
If you take out the loan in your name only (perhaps because your spouse was under 62 at the time), and you die first, your spouse may be at risk. While protections for “Eligible Non-Borrowing Spouses” have improved, it is still a complex legal minefield. Without careful planning, your spouse could face foreclosure upon your death.
The Medicaid Collision: How Reverse Mortgages Affect Care
This is the 2025 crisis point. New York is implementing strict Medicaid rules (the 30-month look-back). A reverse mortgage interacts with Medicaid in dangerous ways.
The “Lump Sum” Disqualification
To qualify for Community Medicaid (home care), you generally cannot have more than ~$30,000 in assets.
The Trap: If you take a reverse mortgage as a lump sum (e.g., $100,000 deposited into your bank), that cash is a “countable asset.” You are instantly disqualified from Medicaid.
The Fix: Taking it as a Line of Credit is safer, but *any* amount you withdraw and do not spend in the same month becomes a countable asset the next month.
It Prevents Use of a Medicaid Trust (MAPT)
This is the biggest conflict. To protect your home from Medicaid Estate Recovery, we usually transfer it into a Medicaid Asset Protection Trust (MAPT).
The Conflict: Most reverse mortgage lenders will not lend on a home that is in an irrevocable trust. Or, if you already have the loan, you generally cannot transfer the deed into the trust without triggering the “due on sale” clause.
The Choice: You often have to choose: Do you want the cash flow (Reverse Mortgage) OR do you want to protect the home value for your heirs (Medicaid Trust)? It is very difficult to do both.
Alternatives to Reverse Mortgages
Before you sign, consider these alternatives that might better protect your legacy.
1. Home Equity Line of Credit (HELOC)
If you have income and good credit, a standard HELOC is much cheaper to set up. It keeps the equity intact and doesn’t have the strict “move-out” rules.
2. Selling and Downsizing
Selling your large home in Long Island and buying a smaller condo or renting frees up equity *without* debt. You keep the full value of the sale.
3. Inter-Family Loans
If your children have the means, they can lend you money secured by the house (a private mortgage). This keeps the interest in the family and avoids bank fees.
Conclusion: Consult a Lawyer, Not Just a Lender
A reverse mortgage is a powerful tool, but it is a chainsaw. Used correctly, it clears a path. Used incorrectly, it causes damage. It should never be entered into without a full review of your estate plan.
Do not let a TV commercial dictate your financial future. Schedule a consultation with the expert team at Morgan Legal Group. We can analyze whether a reverse mortgage fits your goals, or if a Medicaid Trust is the better path to secure your future. You can read our Google reviews to see how we prioritize our clients’ long-term security over quick fixes.
For unbiased information on reverse mortgages, you can visit the Consumer Financial Protection Bureau (CFPB) Reverse Mortgage Guide.
