Reverse Mortgage Cons and How to Deal with Them
Need money for one time expenses or to supplement your retirement income? Over 62? Have a Home with Equity?
Then you probably have heard of reverse mortgages or a Home Equity Conversion Mortgage (HECM). It almost sounds like it is free money. Well, think again and move with caution. A reverse mortgage can help retirement age borrowers, with equity in their home do any or all of the following:
- Stay in their home.
- Take out money for one-time large expenses including medical expenses, helping grandchildren go to college, or fix up the home to meet your special needs.
- Get a monthly draw-down to help make ends meet or maintain a comfortable lifestyle.
All of those are great reasons to consider a reverse mortgage; however, they don’t make a reverse mortgage the best option for everybody. A Reverse mortgages is a complicated financial tool that has to be evaluated as one component in your total retirement financial picture.
Reverse Mortgage Cons – and How to Deal with Them
Before you even consider taking a reverse mortgage, make sure that you understand what it is and how it works. Since the reverse mortgage is not intrinsically good or bad, here are a list of points to consider (cons) and how to deal with them. Make sure that you take away from this article the right questions to ask when shopping for a reverse mortgage. Remember, ask your lender how the reverse mortgage is beneficial, and in which ways it can harm you.
Difficult to Understand:
The Consumer Financial Protection Board (CFPB) in their lengthy reverse mortgage report point out that the reverse mortgages is difficult to understand. Although initially it seems as if a reverse mortgage is a simple loan, reverse mortgages can have serious effects on the borrower, including losing their home, if unable to maintain the mandatory property tax, property insurance and maintenance fees.
- How To Deal with It:
Learn, ask questions, and move with caution. If you are unsure of how the reverse mortgage affects your government assistance rights, your spouse’s rights to the property, your heir’s rights and obligations, your rights to be away from the house, or any other question, then make sure you get the full explanation. Remember, you are obligated to have a housing counseling session if it is a HUD backed reverse mortgage (which almost all are in today’s market).
High Pressure Marketing:
The CFPB also noted that there is a lot of deceptive marketing and predatory lending in the reverse mortgage market. Many senior citizens, who are naturally worried about their financial situation, are easy prey to high-pressure sales tactics. Remember, your house is a valuable part of your net worth. Taking a reverse mortgage and using the money for a fancy boat, car, or vacation is not generally a wise usage of most people’s home equity. It may be easy to take, but you may need that money further down the line.
- How To Deal with It:
Say no! Anytime someone tries to sell you a product that you don’t understand how it works, what the real costs are, and whether it really fits your needs, just say NO! Reverse mortgages can help you if you want to stay in your home, but need extra cash to meet your monthly obligations. It can be extremely helpful if you need extra medical care, or need to fix up your house for special medical conditions. However, make sure that you do your homework and prepare your budget to make sure that you can afford all the required monthly housing expenses, including your property tax, property insurance and necessary maintenance requirements. Make sure that the reverse mortgage covers your long-term goals, because there are many up-front fees.
Misusage of Funds:
The third point that the CFPB pointed out is that many borrowers misuse reverse mortgage funds. Although mentioned above, because many predatory lenders sell reverse mortgages based on frivolous usages of funds, it is worth mentioning again. Although reverse mortgages are not paid back by the borrowers, unless they move away from the house or upon their death, the home’s equity is an important part of anyone’s financial picture. If you do need to move away, will you have enough equity in your home to finance that move? Maybe it was better to take a small home equity loan, or downsize to save monthly expenses.
- How To Deal with It:
Once again, learn about the how reverse mortgages work, and they fit into your retirement financial plan. In general, you can take a reverse mortgage in one of the following manners (or a combination of them)
- Lump sum: This is the only way you can take the money using a fixed mortgage. Once you take it, you have used your that part of the equity in your house. (If the house decrease in value, you are not liable for the loan, more than the house is worth, but you may not have any funds left for other needs).
- Monthly Draw: You can have a monthly draw for a set period, or for your entire life. As a reverse mortgage comes with mortgage insurance (you pay for it upfront), you are guaranteed a set income for the period you choose.
- Line of Credit: You can draw money as you want over the life of the reverse mortgage, up to the amount you were initially approved for, with adjustments made for interest. Make sure that the lender fully explains how the line of credit works. You definitely need to be proactive in your financial planning.
Reverse Mortgage Cons: Make Sure you are the Pro
Other reverse mortgage cons which you should be aware of are:
- High initial costs: This includes mortgage insurance and lender fees.
- Interference with Government Aid: Reverse mortgages are generally tax free, however in certain circumstances they can affect eligibility for Medicare and other government programs (such as Medicare or certain Social Security Supplementary programs).
Reverse mortgages are a unique financial product, which offers senior citizens another option to help them effectively manage their retirement budget and assets. Reverse mortgages, for the right borrower has the great plus of using equity in their house without creating an additional monthly expense, or the pressure to have unaffordable mortgage payments.
Reverse mortgages are expensive and not a short-term solution to a retirees financial problems. By carefully reading about the pitfalls and reverse mortgage cons, you will know the right types of questions to ask, and make sure that the reverse mortgage fits your financial situation. By becoming an informed consumer, you can turn all the cons into pros, and make a wise consumer decision.