Reverse mortgages can be very useful for seniors trying to survive the cost of retirement. It is estimated that between 2% and 3% of seniors have taken out reverse mortgages. That figure is expected to grow as more seniors discover the benefits that reverse mortgages provide. They are particularly attractive to single women.
Seniors are expected to take out $7 billion worth of reverse mortgages in 2021. Reverse mortgages can be important lifelines for seniors facing costly expenses during retirement. Unfortunately, they can also create a lot of headaches if they don’t understand the pitfalls involved. They should do their research by understanding how they work and the problems that could get them in trouble.
Some of the biggest mistakes that seniors make with reverse mortgages are listed below.
Failing to identify the best reverse mortgage options
Not all reverse mortgages are created equal. Some of them are going to be more affordable than others. You don’t want to get into a ton of debt if you worked hard to pay your original mortgage off early.
Unfortunately, many seniors don’t realize that they have a wide range of options to choose from. They might end up taking out a reverse mortgage that is going to cost them or their heirs more down the road.
One of the cheapest options is to use a single purpose reverse mortgage. As its name implies, this type of reverse mortgage is intended for seniors that have an emergency or need quick assistance with a home improvement. It is an extremely cost-effective option when you need a small amount of money one time.
HECM reverse mortgages are also ideal for seniors that want to pay as a little interest as possible. They will be granted a smaller portion of the home equity. Since a smaller loan is less risky to the lender, they tend to charge lower interest rates.
You need to be aware of the different options available to you. You might unwittingly pay a higher interest rate for the same amount of money, simply because it was structured under the wrong option.
Taking the younger spouse off the deed of the home
Some couples decide to take the name of the younger spouse off the deed to the home. This is probably the single worst mistake that you can make when taking out a reverse mortgage.
The reason that this might seem like an appealing option at first is that you can qualify for a lower interest rate. Lenders will look at the ages of the homeowners before underwriting the loan. Since they will reclaim the value of the loan more quickly if the homeowners are older (because they are going to the more likely to die soon), they give lower interest rates to older homeowners. We recommend that you start looking at rates based on this calculator (as rates and costs vary just as traditional loan types).
The problem is that the younger spouse could easily end up losing the property. They might not realize how costly the reverse mortgage is going to be. Since they would have to pay it back before they could get the property back. Even worse, they might be left with nothing if the couple gets divorced or the older spouse doesn’t leave the property to them in the will.
If your older spouse suggests taking your name off the deed, you should see this as a huge financial red flag in your relationship.
Neglecting to pay property taxes and insurance
You need to know the situations where a reverse mortgage will become due. This is going to happen if you don’t pay your property taxes or homeowners insurance.
In the past, there were some seniors that didn’t manage the money that they got from their reverse mortgages properly. They would burn through it and not be able to afford to cover insurance and property taxes later. These seniors would then experience a terrifying sticker shock when they found out that they had to suddenly repay the balance on their reverse mortgage.
Today, lenders are doing their due diligence better when they underwrite reverse mortgages. They try to make sure that homeowners can cover their taxes and insurance before approving the loan.
However, it is still possible for anybody to fall behind. You need to make it a priority to cover all of your insurance and property tax obligations. You don’t want to be stuck finding out that you are reverse mortgage is due and payable.
Spending an extended period of time elsewhere without checking the terms of your reverse mortgage
Every lender has different terms when they create reverse mortgages. They all stipulate that you must pay back your reverse mortgage if you aren’t living in your property anymore.
The problem is that they don’t all use the same criteria for deciding when that is the case. You might unintentionally trigger an obligation to repay your loan if you went to visit your kids in another state for an extended period or went on a long road trip.
Pay close attention to the details of your loan before making those kinds of decisions.