A reverse mortgage can give you the flexibility that you need with the equity in your home. You get to stay in your home and use the loan payments as you choose. However, there are also a number of common pitfalls that can end up costing you more money than you save or that simply waste a lot of your time. Familiarize yourself with the most common reverse mortgage problems so that you do not make these mistakes yourself.
Falling for Reverse Mortgage Scams
As reverse mortgages have become so widespread, there are lots of scammers looking to make a buck on naive individuals. As you research reverse mortgage options, watch out for the following reverse mortgage problems.
- Wrong product. Many reverse mortgage loan officers only offer the product that provides the most compensation for them. Make sure that an officer presents you with all of your loan options and then select the best use of the funds for your situation.
- Pushed into an investment. Investing your reverse mortgage funds may be a smart decision, but it should be your decision to make. You should not be required to buy an investment product in any circumstance.
- Misleading about loan requirements. Be wary of a loan officer who tells you either in person or via advertising that you don’t have to make any payments while you are living in the home. You are responsible for your housing expenses. Make sure that you also understand the occupancy requirements.
- Leaving a spouse off of the loan. It is rarely a good idea to take out a reverse mortgage and leave the younger spouse off of the loan. There are many risks involved in this strategy. Be wary of any loan officer that would suggest this strategy over waiting until the younger spouse turns 62 years old.
- High pressure sales. It is never a good idea to work with someone that wants you to meet their timeline instead of your own. Be concerned if the loan officer starts talking about deadlines that you can’t verify elsewhere.
Believing that a Reverse Mortgage has a Negative Effect on Benefits
A reverse mortgage is a loan as opposed to income. It can affect certain types of federal, state, county, and/or city benefits, such as Medicaid and Supplemental Social Security. However, this is not necessarily a given. The one important thing to keep in mind is that if you do receive Supplement Social Security or Medicaid, any excess reverse mortgage funds that you don’t spend in a given month may count as a liquid or cash asset. Talk to an elder law attorney or your local area on aging office about your specific circumstances.
Not Checking if a Condo Is FHA-Approved
Do you live in a condo and are interested in a reverse mortgage? It is critical to check whether or not the condo is Federal Housing Administration (FHA) approved because the FHA only grants condo loans for buildings that meet their guidelines. The FHA may decline the reverse mortgage application if the building does not have ample reserves, has too many rental units, or has a high number of owners behind on their condo dues.
Not Considering the Alternative Options
A reverse mortgage may be the best option for your given situation. However, it is important to research the advantages and disadvantages of all of your options to make sure that there isn’t a less expensive alternative out there. Home Equity Conversion Mortgage (HECM) origination fees are dependent on the following factors:
- If the home is valued at $125,000 or less, the fee is capped at $2,500.
- You’ll pay two percent of the home’s value up to the first $200,000 and then one percent thereafter up to the maximum of $6,000.
A HECM also includes the following fees:
- Closing costs, which can include the appraisal, lender’s title insurance, closing fees, state intangible taxes, and recording fees.
- An initial mortgage insurance premium can be anywhere from 0.5 to 2.5 percent of the home’s value. This figure depends on the percentage of the loan amount that you take during the first year of the loan.
- A yearly mortgage insurance premium of 1.25 percent of the mortgage balance.
It is typical to roll these expenses into the reverse mortgage as opposed to paying them at closing. It also means that your heirs will take on a bigger debt. If they inherit the house, they are responsible for paying off the reverse mortgage lender.
The bottom line is that it is important to do your research before you commit to any type of mortgage or other kind of loan. You want to make sure that you’re getting the best deal that you can for your money and that you’re doing what is right for your given circumstances.