Reverse mortgages are all the rage among senior citizens with equity on their homes. If this is the first time you’ve heard of it, a reverse mortgage basically works by allowing you to borrow money, using your home as collateral, which in turn, eliminates monthly payments as long as you live in the home. When you move, sell the house, or pass away, the loan, including interest and insurance, becomes due. In fact, you can even receive income from your reverse mortgage for as long as you live in your home.
While reverse mortgages offer several notable benefits, the chance of making the following costly mistakes is also high. Keep reading to learn about these issues.
Not Preparing for Fees
Perhaps the biggest drawback of reverse mortgages are their substantial fees.
For starters, reverse mortgages often come with high closing costs, double the amount in origination fees, and HUD mortgage insurance, which has to be paid upfront. So, for all the benefits a reverse mortgage brings to the table, it’s really more of a last resort than a luxury. Only consider it if you can afford the insurance, maintenance costs, and taxes of your property after factoring in the payout.
Removing the Younger Spouse from the Title
To qualify for a reverse mortgage, some couples remove the younger spouse from the title so that only the older borrower remains. The problem with this strategy is that if the older spouse dies, the younger spouse, or any other heirs, will be left with the burden of paying the balance, which, as pointed out earlier, comes due when the borrower dies.
If the couple does not have a backup plan to cover these expenses (like insurance, for example), or the younger spouse can’t qualify for a reverse mortgage, he or she may be forced to sell the home and move.
You Haven’t Planned for Long-term Care
One of the critical stipulations of reverse mortgages is that the borrower must live in the home. If the mortgage is under your name but you need to leave the home to move into a long-term care facility or nursing home, your reverse mortgage automatically becomes due, regardless of who else is living in the home. As a result, your dependents would have no choice but to sell the home to pay the balance or move out after foreclosure.
The best solution is to acquire a long-term care policy to create an emergency fund for your care needs.
Putting Your Program Eligibility at Risk
Although a reverse mortgage does not usually affect your Social Security or Medicare benefits as the loan won’t be considered as income, taking on this mortgage may inadvertently affect your eligibility for other programs, particularly those geared towards individuals with low income, disabilities, or advanced age. For example, programs like Medicaid have asset restrictions that could disqualify you from financial assistance because of your increased income from your mortgage.
For more information about reverse mortgages, talk to mortgage advisor Chris Lamm to learn about process for this specific loan. Get in touch today by calling our office at 530-282-1166 to schedule a consultation.