Don’t Fall for These Reverse Mortgage Pitfalls

The reverse mortgage sounds like a dream come true. You can tap into your home’s equity and not have to make payments in your lifetime. The only time the loan becomes due and payable is either when you sell the home or you pass away. If you pass away, your beneficiaries must then pay the loan off in full with the proceeds of the sale of your home.

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While the loan sounds great as it gives you the chance to use your home equity while you are still here, there are pitfalls you should watch out for so that you don’t get hurt financially.

Interest Rates Change

Your interest rate on a reverse mortgage usually isn’t fixed. Interest accrues on the reverse mortgage monthly, just as it does with a standard mortgage. As the interest rates change, the amount of interest that accrues on the loan changes. Usually, it means that you’ll owe more interest on the loan.

Even though you aren’t making monthly payments on the mortgage, you’ll still owe the interest when you pay the loan off in full. While you do have the protection that you won’t ever owe more than the home is worth, you still have to pay the interest charges that fit within the home’s value. This could eat away at any proceeds you or your beneficiaries receive in hand.

Your Home is at Risk

Even though you don’t owe payments on the reverse mortgage right now, you can still face foreclosure. You have two responsibilities when you take out a reverse mortgage:

  • You must be able to afford the home’s maintenance
  • You must be able to afford the home’s real estate taxes/homeowner’s insurance

If you violate the terms of this agreement, you could lose your home. The most common scenario occurs when homeowners with a reverse mortgage don’t pay their taxes. The mortgage company checks on the status of your taxes every time they are due and payable. If you don’t keep up with your taxes, you could lose your home and it will have nothing to do with not making your mortgage payments.

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You Could Owe the Full Amount While you are Still Alive

A large part of the reverse mortgage agreement is that you will live in the home as your primary residence. This means you’ll live in the home full-time. The mortgage is offered as a way to let seniors age in place.

If you decide to live in another state for half of the year or you move in with a relative for a period of several months, you could violate the agreement of the loan. This could make the loan due and payable immediately. You agree when you sign the papers that you will live in the home year-round and full-time. Typically, if you don’t live in the home for 12 consecutive months, the bank has the right to demand payment in full at that time. If you are ever thinking about leaving the home for an extended period, run it past your bank to make sure you won’t violate the terms of the loan.

Rolling Your Closing Costs Into the Loan can be Detrimental

Even reverse mortgages come with closing costs. If you can’t afford the closing costs, you may consider rolling them into the loan. After all, you won’t make a payment on it until you sell the house or you die and your beneficiaries have to do it. But what many people don’t realize is how much these costs will increase what’s owed on the loan.

Even though you are only rolling in a few thousand dollars for closing costs, that amount will greatly increase over the life of the loan. Because the interest accrues on the loan over time, you will end up owing a lot more than a few thousand dollars for the cost of the closing costs. It’s best to pay them upfront or not take the loan if you can’t afford the closing costs.

A reverse mortgage can be a great idea if you plan properly. Make sure your beneficiaries know about the presence of the reverse mortgage so that they too can proceed properly. Also, make sure you shop around for the right loan and lender. No two lenders offer the same program and terms for the reverse mortgage.

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