Reverse mortgages are a great way for seniors to access the equity they have built up in their homes. However, there are a few things you need to know before getting one. In this blog post, we will discuss the Biggest Mistakes people make with reverse mortgages. By avoiding these mistakes, you can ensure that you get the most out of your reverse mortgage!
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.
Key Takeaways
- Reverse mortgages can be a great retirement tool but you have to be aware of its possible drawbacks.
- Reverse mortgages are complicated and it’s important that you understand how they work before taking one out.
- Make sure to do your research on the different lenders that offer reverse mortgages and compare their rates,
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 anopens in a new window 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.
If you are married, it is imperative that you think about how a reverse mortgage could impact your spouse’s ability to continue living in the home if they are not listed as a co-borrower on the loan. You should give some thought to purchasing a life insurance policy and designating them as the beneficiary so that, in the event that something were to happen to you, they would have the financial means to pay off the balance of the reverse mortgage.
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, you sold your home for $800,000 and walked away with $750,000 after expenses. And you wanted to spend $600,000 on your retirement home.
Using the opens in a new windowHECM-for-Purchase to purchase your next home, you might put approximately $350,000 down, enjoy all the advantages of the HECM, AND put the remaining $400,000 from the sale of your previous home into your own bank account.
In this example, the real issue with paying cash for your next home is that you may not be able to access the equity when you need it. It is comparable to burying money in your backyard. You are aware that it exists, but reaching it is neither simple nor certain.
In the event that you need to access some of your equity, you may not be eligible for a Home Equity Line of Credit or even a conventional mortgage. These things may be relatively easy to obtain while you are still employed, but when you reach 70 or 80 years of age, the situation changes drastically.
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
The fact that the HECM is what’s known as a “non-recourse loan” is a significant benefit. This means that if the homeowner passes away while still owing money on the loan, the remaining balance won’t be able to exceed the value of the home on the market at the time of the homeowner’s passing.
Therefore, if upon your death you owed $600,000 on your HECM and you had not made a mortgage payment for 20-30 years, and the value of the home at that time was only $500,000, then your heirs would be able to simply walk away from the home without having to pay anything. If the amount you borrowed was greater than the value of the property at the time of your passing, then the debt would never have to be repaid. The difference in cost would be covered by the FHA insurance.
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 opens in a new windowrefinancing 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
A home equity conversion mortgage, or HECM, is a type of mortgage that allows homeowners to borrow against the equity in their homes. Unlike a traditional mortgage, a HECM does not require any monthly payments; however, the homeowner is still responsible for paying their property taxes, insurance, and any routine maintenance that may be required. If the homeowner fails to make those payments, they will be at risk of losing their home. Therefore, it is important to consider whether you will be able to continue making those payments after you retire before you apply for a HECM mortgage.
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 professional before proceeding with the loan.
Conclusion
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.
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 me today to get started!
