Reverse Mortgage Pitfalls

Reverse mortgages are an increasingly popular method for older Americans to convert the equity that they have in their home into cash that they can use for practically any purpose. However there are some reverse mortgage pitfalls you must take in consideration, which we will discuss further in this article. What makes these mortgages particularly attractive to many homeowners is that the money loaned on the value of their home doesn’t have to be repaid in monthly installments. Additionally, the homeowner can remain in the home as long as they wish with no rent or mortgage payments. In fact, the loan doesn’t have to be repaid at all unless the borrower moves from the home or dies. Upon death, the loan is repaid from the sale of the house. For many people, a reverse mortgage will seem more desirable than a conventional home equity load with its fixed repayment schedule.

For seniors pinched for cash to pay their monthly expenses, the opportunity to convert the equity they have in their home to cash that may improve the quality of their lives is an attractive prospect. Many financial advisors, though, view these mortgages as an arrangement to be entered into only as a last resort. These advisors are likely to urge their clients to consider a number of other options before turning to the reverse mortgage.

1. Not examining the total fees for a reverse mortgage
2. Not having an estimate of how long you will be living in the house
3. Trying to finance frivolous purposes with the reverse mortgage
4. Not thinking about the heirs
   

Here are some factors to take into consideration before deciding whether or not a reverse mortgage might be right for you:

• Examine the total fees for a reverse mortgage. Despite recent legislation that places some limits on the upfront expenses for a reverse mortgage, the up front fees attached to the reverse mortgages are very high when compared to more conventional mortgages.

Most experts agree that the reverse mortgage isn’t a wise option for people needing to borrow a relatively small sum for a short period of time. Standard home equity loans are a more preferable method for meeting those needs. If a larger amount is needed for a longer period, the homeowner should first consider alternatives such as selling the house and using the proceeds for a rental or less expensive home, and then use the remaining funds from the sale for living expenses.

• Make a realistic estimate of how long you’ll remain in the home. The fees for reverse mortgages are high, and won’t be justified unless the owner remains in the home at least seven years.

It’s also important to consider if you’re prepared to keep the home physically maintained for a number of years. The mortgage lender will require the homeowner to keep the house in good shape, and pay all of the property owner fees and real estate taxes.

• Be careful in using the proceeds of the reverse mortgage. Obtaining a reverse mortgage to finance somewhat frivolous purposes such as a vacation, or even a vacation home may not be a wise way to use the extra cash.
  

Guard yourself against unscrupulous insurance agents who try to persuade people who’ve just taken a reverse mortgages to funnel the money into some highly risky and inappropriate investments. There are many sad cases of the elderly committing a large portion of the money from the reverse mortgage into variable annuities that may pay them nothing for several years. Others find themselves committing to long term care insurance policies that are very expensive and may not be appropriate for their needs.

• Consider the inheritance factor. If you get a reverse mortgage and continue to live in the house for a long time, the payoff amount on the reverse mortgage will increase significantly. When you die the debt could be equal to, or exceed the sale value of the property. In that case your heirs would receive nothing from the sale of the property.