Reverse mortgages offer senior homeowners financial security by allowing them to access a portion of their home equity. With a reverse mortgage seniors may be able to eliminate their monthly mortgage payments,1 pay off other debts,2 and gain extra cash. However, despite the many benefits a reverse mortgage offers there are pitfalls that can occur when borrowers fail to comply with the obligations of the loan. These pitfalls can be avoided if the borrower is properly educated on their responsibilities. The list below outlines the three most common reverse mortgages pitfalls and how to avoid them.
1. You must continue to live in your home and are financially responsible for it
Reverse mortgages require the borrower(s) to live in the home as their primary residence, continue to pay for homeowners insurance and property taxes, and maintain the house in accordance with FHA guidelines. If these requirements are not met the loan can go into default which may result in foreclosure.
Borrowers can avoid this pitfall by simply continuing to live in their home, making any needed repairs on an annual basis to upkeep the property, and making sure to plan ahead so they are able to pay their taxes and homeowners insurance when the bills become due.
2. If not carefully budgeted, funds can run out
The payment from a reverse mortgage can be configured in a few different ways. One way is as a lump sum payment.3 The pitfall associated with this payment method is that the funds could run out quickly, leaving the borrower unable to cover their costs of living.
Unless the borrower has a need for a large sum of money upfront, it is recommended that they configure their loan payment as a line of credit or as monthly payments. The line of credit will grow over time4 and be available anytime the borrower needs it. Monthly payments can be configured to last a set amount of time, or for the life of the loan and are best for borrowers who plan on using the loan payment for general living expenses.
3. Your heirs must pay off the loan once you pass away
The reverse mortgage becomes due once the last borrower passes away or no longer occupies the home. At this point the heirs will have to decide if they want to sell or keep the home. Heirs can sell the home to pay off the loan balance and receive any excess equity. Or they can refinance the loan or pay off the loan out of pocket to keep the home.
In the event the loan balance is greater than the value of the home, the heirs can either 1) arrange to voluntarily turn over ownership of the property to the lender (Deed in lieu of foreclosure), or 2) buy the home at 95% of the appraised value.
It is important to note that a mortgage is a non-recourse loan, which means that the heirs will never have to pay more than the home is appraised for, and the lender cannot look to other assets for repayment.
If you are a senior homeowner in need of additional income, a reverse mortgage may be an option for converting your home equity into the funds you need.
To learn more or request a free eligibility assessment contact a licensed loan advisor at 1 (800)976-6211 or click here to request a no obligation consultation to discuss your options.
1 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance, and maintain the home according to FHA requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.
2 Your HECM loan will accrue interest that together with principal will have to be repaid when the loan becomes due.
3 The funds available to the borrower may be restricted for the first 12 months after loan closing, due to HECM reverse mortgage requirements. In addition, the borrower may need to set aside additional funds from the loan proceeds to pay for taxes and insurance.
4 The reverse mortgage loan balance grows at the same rate as the available line of credit. Line of credit growth occurs and is only a benefit when a portion of the line of credit is not used. The unused line of credit grows over time and more funds become available during the life of the loan.