Reverse Mortgage Pitfalls: The Truth about 3 Common Misconceptions
For the last half-century, reverse mortgages have offered senior homeowners across the nation the benefit of financial security in retirement. As a type of home loan designed for those age 62 years and older, this powerful tool can help individuals access a portion of their home equity and convert it into cash to supplement a fixed income.
Reverse mortgages are attractive because of the unique features they offer, such as the elimination of monthly mortgage payments, relief from one of the borrower’s largest monthly expenses, and greater control over their finances.
However, just like with other mortgage loans, reverse mortgages come with some restrictions and financial responsibilities. The following are examples of some of the conditions and requirements borrowers can expect with a reverse mortgage loan and key considerations to help them cover their obligations, while they enjoy this flexible financial tool.
Reverse Mortgage Pitfall #1 – The home is still your financial responsibility
It’s your responsibility to fulfill the agreed-upon loan obligations, such as continuing to pay property taxes, homeowners insurance, and maintaining basic home repairs, or the loan may go into default.
A popular benefit of reverse mortgage loans is the fact that you remain the owner of your home as you pay no monthly mortgage payment and receive a portion of your home equity in cash. But, along with ownership of the home comes the common obligations associated with it, such as the payment of homeowners insurance and property taxes. These requirements are often cited as reverse mortgage pitfalls when in reality they are simply obligations to be met for all mortgages, traditional or reverse.
Fortunately, there are a few steps you can take to prepare for this financial responsibility.
- Review all sources of income to ensure that you have the financial ability to fulfill all loan obligations, such as those mentioned above. Make a financial plan for how you can afford these costs, and remember that you may use your reverse mortgage funds to help.
- Arrange your reverse mortgage funds to have a portion set-aside to ensure these loan obligations are covered.
- Plan ahead to spend your reverse mortgage proceeds wisely so you make the most out of your loan and avoid risking default.
Reverse Mortgage Pitfall #2 – You must continue to live in your home
If you live away from your home for more than 12 consecutive months, e.g., by moving into a skilled nursing facility or staying in a second home, the loan may become due and payable.
If you are like most seniors, your home is the preferred setting for care because that is where you are most comfortable. Fortunately, the reverse mortgage loan was designed to help you do just that. Reverse mortgage loans were intended to help seniors stay in their homes as they age, and loan terms require that at least one borrower lives in the home most of the time. A downside to this requirement is that if the last borrower moves to a care facility or another home for more than one year, the loan may become due.
There are several steps you may take to avoid this from happening. Some methods others have used in the past are as follows:
- Talk to a financial advisor about how reverse mortgage funds can help you finance in-home care, should the need arise in the future.
- If you live with others 62 or older, you may want to ensure that they are named on the loan as well. This way, if one of you were to leave, the other may still occupy the home.
- Consult a professional about your long-term care insurance options.
- Time your extended vacations to your second home to be for an amount of time that is less than 12 consecutive months.
- If you want to live with your children in their home for a part of the year, keep track of time to ensure that is for less than a year.
Reverse Mortgage Pitfall #3 – Children & heirs may not agree
Your heirs’ expectations concerning inheritance may not align with your decision to get a reverse mortgage loan.
A reverse mortgage loan is designed to allow senior homeowners to access their hard-earned home equity to use during their golden years. This has helped many retirees supplement their fixed retirement income and maintain their financial independence.
However, using your home equity in retirement this way may decrease the remaining equity in the home. For many retirees, this tradeoff is well worth their financial security.
Later on at loan maturity, the home is typically sold and proceeds from the sale are used to pay off the loan balance. However, for some heirs who may have expected to inherit the home’s full monetary value, the decreased home equity may come as a surprise. Therefore it is important that your heirs understand your desire to supplement your retirement income with your home equity. In fact, you may want to include them in your reverse mortgage research and decision-making process.
The following tips may help you inform your potential heirs about your financial decision:
- Talk to your heirs about your retirement planning and keep the line of communication open to ensure that you are all on the same page regarding their inheritance of your home and how you may consider using your equity. Make sure that they fully understand the possible outcomes at loan maturity.
- Educate them about their future options when your reverse mortgage loan becomes due and payable. Typically:
- Heirs sell the home and use funds to repay the loan. They then keep all remaining funds after loan payoff.
- Heirs may keep the home by either paying off the reverse mortgage loan with their own finances, or they may refinance the loan into a traditional mortgage.
To learn more about reverse mortgages, loan benefits, risks, and obligations, speak with an American Advisors Group reverse mortgage professional at (866) 948-0003. Thousands of senior homeowners across the nation are already using this special loan to help supplement a fixed retirement income and increase their cash flow.
“Home – The Best Place for Health Care.” Jhartfound.org. NP. ND. Web. 25 September 2015. http://www.jhartfound.org/images/uploads/resources/Home_Care_position_paper_4_5_111.pdf
Borrowers won’t owe more than the value of their homes. As long as the borrower complies with the loan terms, he/she doesn’t have to make payments on the loan. With a reverse mortgage loan, the borrower will not lose Social Security or Medicare benefits. Reverse mortgages afford borrowers greater financial freedom and control, providing them the dignity and security they deserve.
This is a popular misconception. When used wisely, a reverse mortgage can be a very powerful, viable and strategic financial tool. There is no better product more readily available to the senior population in terms of supplementing retirement, balancing a portfolio and managing retirement risks. However, the reverse mortgage should be evaluated based on the borrower’s particular needs and financial background. Your AAG reverse mortgage partner can help guide you through your client’s specific situation.
The loan can last for the rest of your life so long as you uphold your obligation to pay taxes and insurance and keep the home in good repair.