Are you considering a reverse mortgage? While a reverse mortgage is a great way to get extra cash in retirement, there are some potential pitfalls that you need to be aware of. Unlike HELOC or Home Equity Line of Credit, there are no payments required with a reverse mortgage. The loan is not due until the home is sold, and the last surviving borrower dies, or permanently moves out of the property.
While reverse mortgages can be a great retirement tool, there are some potential mistakes that borrowers need to be aware of. Therefore it’s important to be aware of the biggest mistakes people make with them. By knowing what to avoid, you can make the best decision for your financial future. So what are the biggest mistakes? Keep reading to find out.
Mistake #1: Not Planning for Your Spouse’s Future
If you are married, it’s important to realize that your spouse may still need to stay in your home after you pass away or can no longer live in your home due to long-term illness. Therefore, you need to file your spouse as an eligible non-borrower so that they can remain in the home as long as they need to. Without this protection, your spouse may be forced to pay the remaining reverse mortgage balance, in order to remain in the home. In addition, you can also purchase a life insurance policy to provide additional financial support for your spouse.
Mistake #2: Spending retirement accounts savings first
The money you saved in your retirement accounts such as 401(K) or IRA is not tax-free when you make withdrawals. While your reverse mortgage proceeds are tax-free income. If you for some reason need to access your retirement account sooner than you planned, the tax on the amount you withdraw could take a big chunk out of what you hoped to have. Therefore you might consider tapping into your reverse mortgage first before dipping into your retirement savings.
Mistake #3: Taking out more than you need
This seems like an obvious mistake, but believe it or not, it happens more often than you’d think. Remember, the interest on your loan and any fees associated with the loan will be added to your overall reverse mortgage balance. So if you borrow more than you need, you’ll end up paying interest on that money – even though you may never see it. A HECM line of credit gives you the flexibility to only borrow what you need when you need it. This could be a great way to avoid this mistake.
You should also be aware to pay property taxes and other related expenses on time to avoid any issues with your reverse mortgage loan.
Mistake #4: Purchase a new home with all cash
Paying all cash for your next home might seem like a good idea at the time, but it’s not always the best financial decision. If instead, you make use of HECM for Purchase, you can reap the full benefits of what the program has to offer. For example, if you sold your home for $800,000 and decide to purchase a retirement home for $400,000. You can put a 50% down payment or $200,000 on your new home and use the remaining amount from the HECM for Purchase program. This will allow you to put the remaining $600,000 into your bank account. With a HECM you are not required to make any payments until you move out of the home permanently. So by using a HECM for Purchase, you will have access to more money, and this could help you enjoy a better retirement lifestyle.
Mistake #5: Not being aware of the interests repercussions
The amount of money you can access from a reverse mortgage depends on several factors, including your age, the value of your home, and the interest rate. But no matter how much money you qualify for, it’s important to only borrow what you need. Remember, the interest on your loan and any fees associated with the loan will be added to the balance of your loan. If you pass away, your spouse will be responsible for paying the reverse mortgage balance. So it’s important to use your money wisely and avoid withdrawing more equity than you need.
Mistake #6: Making zero payments
One of the biggest benefits of getting a reverse mortgage is the fact that you are not required to make any payments until you move out of the home permanently. However, this doesn’t always mean is a good idea to never make a payment. If you have the means to do so, making voluntary payments can help reduce the balance of your loan and save you money in the long run. You also need to be aware that you still have to pay for property taxes and insurance. If you don’t, your loan could become due and payable.
Mistake #7: Not keeping track of changing home value
While it’s great to not be required to make payments on your reverse mortgage loan, it’s important to keep track of the value of your home. If the value of your home increased from the time you originally applied for the reverse mortgage, you may be able to access more money by refinancing your reverse mortgage. For instance, if you got your HECM when your home was valued at $400,000 and today your home is valued at $1,000,000. You may be able to refinance your HECM and access a lot more equity.
If your home value were to decrease, this is where a being a non-recourse loan can help you. You are not responsible for the outstanding balance of your reverse mortgage loan if the value of your home falls below what is owed on it.
Mistake #8: Not telling your children about the reverse mortgage
Believe it or not, one of the biggest mistakes people make with a reverse mortgage is not telling their heirs or children about it. If you have a HECM and something happens to you, your children will need to know about the loan so they can either sell the home to pay off the loan or refinance the loan into their name. They might also be expecting that you leave them the home, but if you have an outstanding reverse mortgage balance that exceeds the current market value of the home, they might not get it. It’s always a better idea to be upfront and honest with your family about your financial situation so there are no surprises down the road.
Mistake #9: Not keeping up with property taxes and insurance payments
In order to maintain your HECM loan in good standing, you need to pay your property taxes and insurance on time. If you are not able to make these payments, your loan could become due and payable. Before taking out a reverse mortgage, it’s important to be sure that you will be able to continue to pay for your property taxes and homeowners insurance. Unlike a home equity loan, a reverse mortgage does require you to pay for these expenses out of pocket.
In addition, you should be aware that certain types of reverse mortgages will require you to pay mortgage insurance premiums to FHA (Federal Housing administration) for a certain period of time.
Mistake #10: Closing credit cards accounts of paying them off
Using the money from your reverse mortgage to pay off credit card debts is often a great idea. It will free you from having to make monthly payments, reduce the amount of interest you are paying and also improve your credit score. However, some people are not aware you shouldn’t close the credit card accounts that you just paid off. This often results in a huge drop in credit scores. Once you’ve paid off the loan balance, just leave the account open and don’t use it. Your credit score will thank you for it.
Mistake #11: Not improving spending habits
If you maintain your current spending habits, a reverse mortgage is not going to save you any money. In order to be successful with your HECM, you need to make sure that you are always aware of your loan balance also ways to use the funds wisely, and cut back on unnecessary expenses. This will give you the best chance of having the money last as long as you need it.
Mistake #12: Not comparing reverse mortgage companies
When you’re shopping for a reverse mortgage, it’s important to compare rates and fees from different lenders. Some lenders may charge higher fees or offer lower interest rates than others. It’s also important to read the fine print and make sure you understand all the terms and conditions of the loan. It’s also very helpful to choose a reverse mortgage consultant that has the experience and understanding of your specific needs. This will ensure that you are getting the best advice and service possible. A good reverse mortgage company must also make sure you see a reverse mortgage counselor before proceeding with the loan.
While a reverse mortgage provides you with financial flexibility and the opportunity to unlock the equity in your home, it’s important to be aware of the biggest mistakes people make with reverse mortgages. These include not understanding how a reverse mortgage works, being aware of your loan balance, falling behind on property taxes or insurance payments, not telling your family about the loan, and more. Therefore, it is important to research your options carefully and work with a qualified reverse mortgage lender or consultant who can help you make the best decision for your financial needs.
All of these mistakes can be easily avoided by working with a reverse mortgage consultant. They will help you understand all of your options and ensure that you make the best decision for your needs. Don’t let making a mistake keep you from getting the benefits of a reverse mortgage, contact us today to get started!