Taking on a reverse mortgage can be a smart move or a financial disaster, depending on the type of loan and your circumstances. Avoid these mistakes to make a reverse mortgage a smart move.
Mistake #1: Taking out the wrong mortgage
What's the best mortgage for you? The one that accomplishes your objectives at the lowest cost. Here, in order of cheapest to most expensive, are home equity financing options for seniors.
1. Single purpose reverse mortgage: This loan is available to very low-income seniors and costs little or nothing. It may provide a limited amount of funding for home maintenance or property taxes.
2. Home equity loan or line of credit: You have to have good credit and sufficient income to cover monthly payments, and if you do, these loans are very cheap to obtain.
3. Home Equity Conversion Mortgage (HECM) Saver reverse mortgage: This is a lower-cost option for those seniors who want to cash out a smaller percentage of their home's equity.
4. HECM Standard reverse mortgage: These loans come with fairly high upfront charges but allow you to cash out a larger portion of your home's equity.
5. Jumbo reverse mortgages: These loans are less regulated, so you need to shop carefully, but they allow people with high-end homes to get larger loans than HECM regulations allow.
Mistake #2: Not considering your future
Reverse mortgages are characterized by one thing: you don't make payments on the loan as long as you own and live in your home. However, the definition of "living in the home" can vary from lender to lender. So if you are planning a jaunt around the world or your health is less than optimal, a reverse mortgage may not be for you. The high upfront cost associated with some reverse mortgage programs means that they can be very expensive if you don't keep your loan for a long time.
In addition, some couples play a risky game when they remove the younger spouse's name from the home's deed so that they qualify for a bigger loan (your maximum loan amount is determined by the age of the youngest borrower as well as interest rates and the home's value). When the older spouse dies or moves out (for example, to a nursing home), the younger one can unexpectedly end up homeless.
Mistake #3: Taking the proceeds the wrong way
You can choose to take your funds as a lump sum, a line of credit, a series of payments, monthly payments for life, or some combination of these methods. Sometimes the way you get your funds affects your eligibility for government programs. While taking a reverse mortgage doesn't affect entitlements like Social Security income or Medicare benefits, be wary of getting one if you receive Medicaid or Supplemental Security Income (SSI).
Reverse mortgage payments are not considered income to you, but they can become an asset if you are not careful, for example, if you receive proceeds from your loan that you don't spend right away. If a borrower has less than approximately $109,560 in assets while a spouse resides in a nursing home, a reverse mortgage lump sum distribution could put Medicaid eligibility in jeopardy. This maximum asset amount may vary and those considering reverse mortgages should ascertain the amount that applies in their state before proceeding.
Mistake #4: Succumbing to high-pressure sales tactics
A report by Consumers Union and other advocacy groups found that seniors are being sold reverse mortgages when the product is not their best option, and cross-sold other financial products as well. While it is illegal for a lender to require the purchase of other products as a condition for getting a reverse mortgage, lenders are still able to market these other financial products.
The General Accountability Office (GAO) recently found that the cross-selling of products in conjunction with reverse mortgages confuses consumers and creates opportunities for abuse. Cross-selling can be described as encouraging borrowers to use reverse mortgage funds to purchase insurance or other products that may not be in the borrower's best interest, and are potentially unsuitable given the borrower's personal financial circumstance. The GAO noted, for example, that cross-selling "an annuity that defers payments for a number of years may be unsuitable for an elderly person." In one case, an 80-year-old woman was sold a reverse mortgage and $80,000 in annuities. The policies came with a 20 percent penalty if she withdrew the money within 10 years. She would have been 90 years old before she could get her money! It can't hurt to have a trusted relative, friend or financial advisor go over your paperwork before you commit to anything.
Mistake #5: Paying too much
While fees for HECMs, which account for about 90 percent of all reverse mortgage business in the U.S., are regulated by the federal government, and interest rates are determined by the market. In addition, rates and costs for jumbo reverse mortgages are not set by the government. Shopping with several mortgage lenders can help ensure that you get a fair deal on your reverse mortgage.
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