5 Biggest Mistakes People Make With Reverse Mortgages

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5 Biggest Mistakes People Make With Reverse Mortgages

Through the use of reverse mortgages, qualified retirees may access home equity to generate additional income. As long as the borrower is using the house as their primary residence, a reverse mortgage amount is not subject to repayment, unlike a home equity loan or home equity line of credit (HELOC). Despite the fact that it could seem enticing, it’s important to be aware of the most typical errors that reverse mortgage borrowers make.

Key Takeaways

  • Reverse mortgages provide qualifying homeowners the opportunity to generate an income stream from their home equity.
  • Home equity conversion mortgages (HECMs), which are reverse mortgages guaranteed by the federal government, have unique qualifying requirements.
  • The most common reverse mortgage errors are failing to comprehend how they operate, failing to compare reverse mortgage providers, and skipping payments for insurance or property taxes.
  • It’s crucial to think about how the money will be used and how the remaining debt will be repaid when obtaining a reverse mortgage.

How Reverse Mortgages Work

A reverse mortgage may first resemble a home equity loan or HELOC, but they don’t operate in the same manner. A homeowner may take out equity from their property using a reverse mortgage, usually in the form of monthly payments or a lump amount. No payment is required on the debt, which accrues interest and fees, as long as they dwell there and use it as their primary residence. The whole sum becomes due if the house is no longer used as the owner’s principal residence.

Home equity conversion mortgages are a kind of reverse mortgage that are guaranteed by the federal government (HECMs).Regarding eligibility, this kind of reverse mortgage has special requirements. In order to be eligible for a HECM, homeowners must:

  • Be 62 or older
  • own a freehold residence (or have paid off most of their mortgage)
  • possess the financial means necessary to pay property taxes, insurance, upkeep, repairs, and maintenance
  • not owe any unpaid federal obligation
  • Attend authorized counseling for reverse mortgages.

Because HECMs are Federal Housing Administration (FHA)-backed loans, closing fees and mortgage insurance premiums (MIPs) are applicable. Single-family houses, two- to four-unit buildings with the owner residing in one of the units, condominium developments with HUD approval, individual condominiums with FHA approval, and prefabricated homes with FHA approval are all examples of property types that qualify.

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Important

In order to be eligible to delay repayment of the reverse mortgage amount in the event that the principal borrower vacates the property or dies, a spouse who is younger than 62 may be designated on a home equity conversion mortgage as a non-borrower eligible spouse.

Common Reverse Mortgage Mistakes

The choice to get a reverse mortgage may have financial repercussions for you, your spouse, and/or your heirs. Therefore, it’s crucial to understand what errors to avoid when submitting a HECM or reverse mortgage application.

Mistake No.1: Withdrawing more equity than you need

The value of your property, your age, and the prevailing interest rates may all affect how much equity you can access via a reverse mortgage. You must pay back the equity you withdrew, plus interest and any costs. Therefore, taking out more equity than necessary is a mistake.

Even if you die away and are no longer responsible for paying back the sum, it still exists. The remaining payment would still be due from your spouse or heirs. They can be compelled to sell the house in order to pay off the reverse mortgage sum if they have no other assets.

Mistake No.2: Failing to pay property taxes and insurance

Homeowners who use a HECM must keep their property taxes and homeowner’s insurance current. If you have a HECM and you miss any of these payments, the remaining amount on the reverse mortgage is due in full right away.

If you don’t have enough cash on hand to cover the sum or you have to use your savings to pay it off, that might become an issue.

Mistake No.3: Not planning for a spouse’s needs

If you get a reverse mortgage while still married and your spouse is not named as a borrower, they may suffer if you outlive them or need to enter long-term nursing care. The U.S. Department of Housing and Urban Development (HUD) makes a distinction between eligible and ineligible non-borrowing spouses in the context of a home equity conversion mortgage.

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If the borrower spouse vacates the property or dies away, eligible non-borrower spouses could be permitted to live there without contributing to the reverse mortgage. This protection does not apply to spouses of ineligible non-borrowers, thus in order for them to stay in the house, they would have to pay the reverse mortgage sum.

If you’re married and your spouse isn’t listed as a co-borrower, it’s crucial to think about how a reverse mortgage can influence their ability to remain in the house. To ensure they have funds available to settle the reverse mortgage debt in the event that anything were to happen to you, you can think about getting life insurance and designating them as the beneficiary.

Note

After taking out a reverse mortgage, you cannot add your spouse or another family member to it.

Mistake No.4: Not telling heirs about a reverse mortgage

Reverse mortgages might come as an unpleasant surprise to your children or other heirs if you want to gift your house to them after your passing. Once again, they could have to sell the house if they are unable to raise the money to pay down the reverse mortgage sum. By explaining the specifics of your reverse mortgage to your heirs, you may help them create a backup plan for how to manage it after your passing.

Tip

Your loved ones may feel less financial strain if you establish a life insurance policy or include a clause in your will designating certain assets for the repayment of the reverse mortgage.

Mistake No.5: Not shopping around for a reverse mortgage

There are many reverse mortgage firms, but not all of them are made equal. It’s crucial to weigh your alternatives before applying for a reverse mortgage so you can understand how much of your home equity you may be able to remove as well as any fees or interest rates that could be associated with the loan. Before picking a reverse mortgage provider, it might be useful to check ratings with the Better Business Bureau (BBB). You can search for the top reverse mortgage providers online.

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What Is a Reverse Mortgage?

A reverse mortgage is a kind of financial arrangement that enables homeowners to access the equity in their houses without having to pay a lender on a regular basis. Reverse mortgages may have financial repercussions for borrowers, their spouses, and their heirs, although they are intended to assist elderly homeowners generate more income.

Can a Family Member Take Over a Reverse Mortgage?

No more borrowers may be added to a reverse mortgage after it has been obtained. If you’re married and your spouse isn’t eligible, you could still be able to add them as an eligible or ineligible non-borrowing spouse when you apply for the reverse mortgage.

Can Heirs Walk Away From a Reverse Mortgage?

Reverse mortgage balances do not have to be repaid by heirs. However, if they want to keep a house they inherited with a reverse mortgage, they must pay down the whole debt. If not, they could have to sell the house to cover the reverse mortgage debt.

The Bottom Line

Reverse mortgages may provide senior homeowners a reliable source of income, but it’s crucial to comprehend how they operate to prevent potentially expensive errors. You may learn more about reverse mortgages by speaking with a reverse mortgage lawyer or financial counselor. A reverse mortgage consultant may also assist you in assessing options, such as a home equity loan or line of credit, that may be more suitable for your circumstances.

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