A reverse mortgage loan can offer older adult homeowners financial security by allowing them to access a portion of their home equity. With a reverse mortgage, older adults may be able to eliminate their monthly mortgage payments,1 pay off other debts,2 and have extra cash flow. Despite the benefits of a reverse mortgage loan, there are a few pitfalls that can occur when borrowers fail to fulfill the loan obligations. However, these can be avoided if the borrower understands their responsibilities.
Here are a few of the common reverse mortgage pitfalls and how to avoid them.
You must continue to reside in your home and are financially responsible for it
Borrowers are required to live in their home as their primary residence, continue to pay for homeowners insurance and property taxes, and maintain the house per 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 continuing to live in their homes, making any necessary repairs, maintaining the property, and paying their taxes and homeowners insurance on time.
Have a budget, funds can run out
The payment from a reverse mortgage can be arranged in a few different ways. One way is as a lump sum payment.3 The pitfall that can happen with this payment method is the funds could run out quickly, leaving the borrower unable to cover their costs of living.
Unless the borrower needs a large sum of money upfront, it is recommended they receive their loan payment as a line of credit or as monthly payments. The line of credit will grow over time4 and is there when the borrower needs it. Monthly payments can be for a set period, or for the life of the loan and are best for borrowers who plan on using the funds for daily living expenses.
Once you pass away, your heirs must pay off the loan
When the last borrower passes away or no longer occupies the home, the reverse mortgage becomes due. The heirs will need 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.
It is important to note that a mortgage is a non-recourse loan, 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 an adult 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, call 800.976.6211 to speak with a licensed loan advisor.
1 Your current mortgage(s) and any other existing liens against the property must be paid off at or before closing. 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.
2Your HECM loan will accrue interest that together with principal will have to be repaid when the loan becomes due.
3The 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.
4The 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.
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