Avoid These Reverse Mortgage Mistakes
For some retirees, a reverse mortgage can be an effective retirement tool.
Reverse mortgages allow Americans aged 62 and older to convert part of their home equity (wealth) into cash without selling their home. This can help retirees supplement their monthly expenses or prepare for unexpected costs.
In a reverse mortgage:
- The lender pays you using a percentage of equity that you’ve built up from years of making mortgage payments. The money you receive usually isn’t taxable, and it generally won’t affect your Social Security or Medicare benefits.
- You’re not required to pay back loan balance while you live in the home. If you pass away, sell the home, or the home isn’t your primary residence for more than 12 months, the loan comes due. This means you or your estate must repay the loan.
- You’re able to keep the title of your home. This means you’re responsible for paying property taxes, homeowner’s insurance and other expenses.
But before you rush into applying for a reverse mortgage, here are three mistakes to avoid:
Wasting your loan money on non-essential purchases
How you use your reverse mortgage proceeds is completely up to you, but we strongly advise you to use your loan proceeds wisely. Try to resist spending your home equity (that you’ve built up over decades) on impulse purchases, and use it for essential purchases or as a “rainy day fund.”
Not paying your property taxes and homeowner’s insurance
In the past, some borrowers spent their life savings and reverse mortgage proceeds, leaving nothing left to pay their property taxes and homeowners insurance. This caused the reverse mortgage balance to become due and payable.
Due to recent regulations, reverse mortgage lenders are now required to conduct financial assessments to ensure applicants can successfully tap into their home equity while also being able to afford taxes and insurance. You should be confident that you can stay current and up-to-date on taxes and insurance before you take out a reverse mortgage.
Not telling your family about your reverse mortgage
As with all financial decisions, reverse mortgages should be carefully considered. Because a reverse mortgage loan balance becomes due after the last surviving borrower passes away, it can be an unpleasant surprise to learn that their parents’ reverse mortgage is now due and payable.
By speaking with loved ones about your reverse mortgage plans, you can help avoid misunderstandings and give heirs time to plan whether to refinance and keep the home or sell it and repay the reverse mortgage upon your death.
Reverse mortgages offer many benefits, but must be researched carefully
Taking out a reverse mortgage can be an effective retirement strategy, particularly for supplementing retirement savings or preparing for unexpected costs.
But you should research reverse mortgages before applying for one, and discuss your plans with your family members . This can help you decide if a reverse mortgage is the right step for your unique situation.
To learn more about reverse mortgages, please contact me today!