Potential Reverse Mortgage Pitfalls
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- Kirk Haverkamp | November 22, 2011
If you’ve seen the recent ads with Robert Wagner promoting them, you may be wondering what reverse mortgages are all about.
In simplest terms, they’re a type of home equity loan available to homeowners age 62 and above. Designed for seniors who may be “cash poor but house rich,” they offer a way for seniors to cash in on the value of their home without having to sell the property.
About reverse mortgages
They’re called reverse mortgages because many borrowers choose to take their money in installments, often as a monthly payment that continues for as long as they remain in the home. The mortgage company sends a check to them each month, rather than the other way around as in a regular mortgage.
One of the attractive things about a reverse mortgage is that you can never lose your home due to mortgage debt. Even if you live to be 110 and your payouts and interest eventually exceed what the home is worth, you’re still entitled to stay in your home, provided other terms are met.
That being said, there are some distinct pitfalls to be wary of when considering a reverse mortgage. Here are some of the main ones.
Excessive costs
Although reverse mortgages are convenient, they can be expensive, particularly if you’re not careful. Because fees and interest aren’t billed to you directly – instead, they’re charged against the equity in your home – it’s easy for borrowers to overlook just how much they’re actually paying.
Don’t forget, whatever equity remains in your home when you eventually vacate it belongs to you or your estate – you’re not simply signing your house over after you’re gone in return for a steady stream of income. You may need that money if you move into an assisted living facility or you may wish to leave some to your heirs – so excessive financing costs will eat into that. Look for the best deal you can.
Borrowing too much
Another common problem is borrowers who take more cash than they need out of their home, either as a lump sum or a series of payments. Remember, the reverse mortgage company isn’t simply buying your home from you a bit at a time, you’re borrowing against its value – and borrowing means interest payments.
Taking too much cash out of your home not only reduces the remaining equity you’ll have left when you eventually vacate the property, it also boosts the amount of interest you’ll be paying, reducing your remaining equity even more.
Buying unneeded products
Unfortunately, some companies use reverse mortgages as a vehicle to sell financial products of questionable value, such as annuities or insurance programs with high commissions or hidden fees that diminish their value to the person investing in them.
Although these types of products can be an important part of financial planning for retirement, be wary of purchasing them from the same agent or company selling you a reverse mortgage. It’s best to consult with an independent financial advisor who has no interest in whether you take out a reverse mortgage or not when considering such investments.
Neglecting what comes next
A major mistake many seniors make when taking out a reverse mortgage particularly one that provides regular monthly payments for as long as they remain in the home, is overlooking the fact they may vacate the home while still alive.
Moving into an assisted living facility, for instance, can trigger the provision in a reverse mortgage that the loan must be repaid – typically by selling the property. In some cases, an extended illness could be deemed as having vacated the property, even though you intend to return to your home after discharge from a hospital or nursing facility.
The forgotten spouse
A serious problem can occur when a couple occupies a home, but the reverse mortgage is taken out in only one spouse’s name. The way the rules are written, the second spouse could either be forced to vacate the home or pay off the loan when the first spouse dies or has to enter an extended care facility.
Many borrowers simply assume that under a reverse mortgage, both spouses will be able to use the home as long as they need to. But unless both are listed on the loan, that isn’t the case.
Overlooking taxes and maintenance
Many homeowners get the impression that they can never lose their home due to circumstances related to a reverse mortgage. While that’s true with regard to declining equity and accumulated interest charges, there are two other things to look out for – taxes and maintenance.
With a reverse mortgage, you’re still obligated to keep up your tax payments and maintain the house in a manner that protects the mortgage company’s investment. If you don’t, you can still forfeit the property, either to the government or the lender.
Reverse mortgages can be a useful tool in requirement planning, and a much-needed source of revenue for retirees who don’t want to give up their homes. However, like any major financial transaction, they need to be approached with care. Consulting with an independent financial advisor beforehand, one who has no stake in whether or not you get a reverse mortgage, is strongly advised.
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