The 5 Biggest Mistakes People Make With Reverse Mortgages
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Reverse mortgages can provide an additional source of income for eligible retirees by allowing them to tap into the equity in their home. Unlike a home equity loan or home equity line of credit (HELOC), no payment is due on the balance of a reverse mortgage as long as the borrower continues to use the home as their principal residence. While that may sound appealing, it’s important to be aware of the most common mistakes to avoid with reverse mortgages.
Key points to remember
- Reverse mortgages allow eligible homeowners to turn their home equity into an income stream.
- A federally backed reverse mortgage is called a home equity conversion mortgage (HECM), which has special eligibility rules.
- Some of the biggest reverse mortgage mistakes include not understanding how a reverse mortgage works, not comparing reverse mortgage companies, and falling behind on property taxes or insurance payments. .
- When obtaining a reverse mortgage, it is important to consider how the funds will be used and how the balance will be paid off.
How Reverse Mortgages Work
At first glance, a reverse mortgage may seem similar to a home equity loan or a HELOC, but they don’t work the same way. With a reverse mortgage, a homeowner is able to withdraw equity from their home, usually in installments or in a lump sum. As long as they live in the house and use it as their primary residence, no payments are due on the balance, which accrues interest and fees. Once the owner ceases to use the house as a principal residence, the full balance becomes due.
Federally backed reverse mortgages are called home equity conversion mortgages (HECM). This type of reverse mortgage has specific guidelines regarding eligibility. To qualify for a HECM, owners must:
- Be 62 or older
- Own your home (or have paid off most of your mortgage)
- Have financial resources that would allow them to pay for property taxes, insurance, upkeep, repairs and upkeep
- Not being delinquent on the federal debt
- Attend Approved Reverse Mortgage Counseling
Home equity conversion mortgages have closing costs that apply and homeowners must also pay Mortgage Insurance Premiums (MIPs) as these are loans backed by the Federal Housing Administration (FHA). Eligible property types include single-family homes, two- to four-unit homes when the owner lives in one of the units, HUD-approved condominium projects, FHA-approved single-family condos, and government-approved manufactured homes. the FHA.
Important
A spouse under age 62 can be listed on a home equity conversion mortgage as an eligible non-borrowing spouse, allowing them to defer repayment of the reverse mortgage balance if the primary borrower moves or dies.
Common Reverse Mortgage Mistakes
The decision to get a reverse mortgage can affect you financially and potentially your spouse and heirs. It is therefore important to know what mistakes to watch out for when applying for a reverse mortgage or HECM.
Mistake #1: Withdrawing more equity than you need
The amount of equity you can leverage using a reverse mortgage may depend on the value of your home, your age, and current interest rates. The equity you withdraw must be repaid with interest and fees added. For this reason, it is a mistake to withdraw more equity than necessary.
Even if you don’t have to repay that balance yourself because you die, the amount doesn’t disappear. Your spouse or heirs would still be responsible for repaying the balance. In the absence of other assets, they may be forced to sell the home in order to pay off the reverse mortgage balance.
Mistake #2: Not paying property taxes and insurance
A home equity conversion mortgage requires the homeowner to stay current on their property taxes and home insurance. If you have a HECM and are late on any of these payments, the reverse mortgage balance immediately becomes due in full.
This could become a problem for you if you don’t have enough cash in reserve to cover the balance or if you have to dip into your savings to pay it off.
Mistake #3: Not planning for a spouse’s needs
Getting a reverse mortgage while you’re married can have implications for your spouse if he survives you or if you have to move into long-term nursing care and he’s not listed as a borrower on the loan. In the case of a home equity conversion mortgage, the US Department of Housing and Urban Development (HUD) distinguishes between eligible and non-eligible non-borrowing spouses.
Qualifying non-borrowing spouses may be able to stay in the home without having to pay anything for the reverse mortgage if the borrowing spouse moves or dies. Ineligible non-borrowing spouses do not have this protection, which means they would have to pay off the balance of the reverse mortgage to stay in the house.
If you’re married, it’s important to consider how a reverse mortgage might affect your spouse’s ability to stay in the home if they’re not listed as a co-borrower. You may consider taking out a life insurance policy and naming her as the beneficiary so that she has cash to pay the balance of the reverse mortgage if something happens to you.
To note
You cannot add a spouse or other family member to a reverse mortgage after you already have one.
Mistake #4: Not Notifying Heirs of a Reverse Mortgage
If you plan to leave your home to your children or other heirs, not telling them about a reverse mortgage in advance can lead to a nasty surprise after you die. Again, if they cannot find the financial resources to pay off the reverse mortgage balance, they may have to sell the home. Talking to your heirs about the details of your reverse mortgage can help them make a contingency plan on how to handle it after you leave.
Point
Establishing a life insurance policy or designating in your will that certain assets be used to pay off the reverse mortgage can help take some of the financial pressure off your loved ones.
Mistake #5: Not Shopping for a Reverse Mortgage
There are a number of reverse mortgage companies out there, but not all are created equal. Before applying for a reverse mortgage, it’s important to compare options to understand how much equity you could get in your home and what fees and interest rates may apply. You can shop online for the best reverse mortgage companies and it can also be helpful to compare ratings with the Better Business Bureau (BBB) before choosing a company to work with.
What is a Reverse Mortgage?
A reverse mortgage is a financial arrangement that allows a homeowner to take equity out of their home without having to make monthly payments to a lender. Reverse mortgages are designed to help senior homeowners create additional income, although they may have financial implications for borrowers, their spouses and heirs.
Can a family member take over a reverse mortgage?
Once a reverse mortgage has been taken out, no other borrowers can join it. If you are married and your spouse does not meet the eligibility criteria, you may still be able to add them as an eligible non-borrowing or ineligible spouse when you take out the reverse mortgage.
Can heirs waive a reverse mortgage?
Heirs are not obligated to repay the balance of a reverse mortgage. However, if they wish to keep a home they inherit that has a reverse mortgage, they will need to pay off the balance in full to do so. Otherwise, they may have to sell the house to pay off what is owed for the reverse mortgage.
The essential
A reverse mortgage can provide a steady stream of income for older homeowners, although it’s important to understand how they work to avoid potentially costly mistakes. Talking to a reverse mortgage lawyer or financial advisor can help you better understand reverse mortgages. A reverse mortgage advisor can also help you assess which alternatives might be better suited to your situation, such as a home equity loan or a line of credit.