If you're a senior citizen who owns a home with equity, you may have heard some buzz about reverse mortgages. Increasing in popularity and attention, reverse mortgages are for homeowners 62 and older. The benefits of reverse mortgages are high, but so are the risks.
Basically, reverse mortgages mean no monthly payments are due until you die, move or sell the home, at which point, the loan is due in full, complete with interest and fees. In fact, you can receive monthly income from a reverse mortgage as long as you live in your home.
The idea of a mortgage-free existence and higher income leads seniors to envision a cushy retirement. However, the upfront costs are higher for reverse mortgages than for typical mortgages, and if you don't handle this right, you could lose a lot at a time when you can least afford to.
Here are the five biggest mistakes to avoid when looking into reverse mortgages:
Reverse Mortgage Mistake #1: Underestimating reverse mortgage fees. Frankly, reverse mortgages are expensive loans. Closing costs for reverse mortgages are high; origination fees can be double that of conventional mortgages. Plus, you have to pay HUD mortgage insurance upfront. For that reason, reverse mortgages are usually less a luxury than a last resort. If you can't afford the insurance, taxes and maintenance of your property, even with the payout you're getting, a reverse mortgage is not for you.
Reverse Mortgage Mistake #2: Qualifying for a reverse mortgage by removing the younger borrower from the title so only the older borrower remains. The flaw in this strategy is if the older spouse passes away first, the younger spouse is then responsible for paying the balance. If arrangements haven't been made or insurance doesn't cover expenses, and the younger spouse doesn't qualify for a reverse mortgage on his or her own, he or she may have to sell the home and move. Likewise, a reverse mortgage isn't a good idea if at least one of the borrowers isn't able to stay in the house due to poor health. If all borrowers on the loan are out of the house for 12 months, including time spent in nursing homes, the mortgage is due in full.
Reverse Mortgage Mistake #3: Losing program eligibility due to reverse mortgages. While reverse mortgages shouldn't affect your Social Security or Medicare benefits, it could affect Medicaid benefits and Supplemental Security income. If you take all your money upfront and deposit the proceeds into your bank account at once, you could make yourself ineligible. In fact, if you don't spend the reverse mortgage payouts within the same month, you could be over your Medicaid or SSI asset limit, which is $3,000 for couples and $2,000 for singles, and your eligibility for these programs could be in jeopardy. Contact your financial adviser or SSI administrator to make sure you're safe.
Reverse Mortgage Mistake #4: Assuming your condo qualifies for a reverse mortgage. Many seniors own condo units -- these seniors don't necessarily qualify for reverse mortgages. Condos must meet tighter FHA restrictions than single-family homes. Also, condo developments as a whole can be disqualified from reverse mortgages if a high number of condo owners are delinquent on association fees or if the condos have insufficient reserve funds. Other FHA requirements address insurance and the number of investor-owned units.
Reverse Mortgage Mistake #5: Falling for reverse mortgage scams. As reverse mortgages have exploded in popularity, reverse mortgage scams have inevitably risen, too. Some red flags for reverse mortgage scams are if someone assists you in getting a reverse mortgage, but charges an exorbitant fee, maybe even as high as the amount of the actual loan. Other common reverse mortgage scam artists provide fraudulent loans or steal your identity. Reverse mortgage scam artists often target people who attend investment seminars or respond to ads. If you want to make sure your reverse mortgage lender is legitimate, make sure it is approved by the Federal Housing Administration, and seek outside advice from a professional.
Although reverse mortgages are usually easy to qualify for -- since there are no income or credit requirements -- don't make the mistake of thinking they're easy. Reverse mortgages are highly complex loans, so be sure to get adequate counsel.
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