Avoiding Dangers of Reverse Mortgages
Many people know relatively little about reverse mortgages , and where there is uncertainty, there's often fear. And there should be. A reverse mortgage typically involves a large sum of money and it's a transaction you probably won't be undertaking too many times. Here's how to get it right.
Danger #1: The Unknowable Future
Reverse mortgage programs are characterized by one thing: you don't make payments on the loan--as long as you own and live in your home. And the best way to lower the overall cost of the loan is to stay in your house a long time and keep getting those monthly checks. But unexpected events can change the best-laid plans. And if you end up in a hospital or nursing home, or if you have to move, for example to a single-story home, the lender will call in the loan. Some mortgages have clauses that state that the loan must be repaid if the home is unoccupied a certain period of time, and some lenders are more liberal than others. Read your documents and know what this time period is--you don't want to emerge after a lengthy hospital stay to find your home in foreclosure.
Danger # 2: Taking More Than You Need
Reverse mortgages, like other home loans, are costly to originate. Fees for title insurance, appraisals, inspections, documents, etc., can add up quickly. It may make perfect sense to pay these if you are taking a large sum of money but not for a smaller amount. For example, $6,000 in fees to get $200,000 amounts to 3%. That same $6,000 when you only need $20,000 equals 30%! A home equity loan or line of credit would serve you far better if you qualify for one. These loans come with low or no fees and are far more cost effective for smaller amounts.
Danger #3: High Pressure Sales Tactics
Consumer Reports warns against caving in to aggressive, high-pressure salespeople when taking out a reverse mortgage. According to CEASE, the Coalition to End Elder Financial Abuse, insurance brokers are recruiting loan agents to sell reverse mortgages, even offering to help them become HUD-certified counselors. The objective is to get these salespeople to convince seniors to pull equity from their homes to buy insurance products. In one case, an 80-year-old woman, who just needed some cash to fix up her porch, was pushed to take out a reverse mortgage for over $200,000 and invest $80,000 in annuities. The policies came with a 20% penalty if she withdrew the money within ten years. She would have been ninety years old before she could get all her money out! If you are worried about such tactics, have someone you trust go with you when you speak to a potential lender. And if a salesman puts the squeeze on you, just leave quickly.
Danger #4: Loss of Government Benefits
While taking a reverse mortgage doesn't affect entitlements like Social Security income or Medicare benefits, be wary of getting one if you receive Medicaid or Supplemental Security Income (SSI). Reverse mortgage payments are not considered income to you but can affect your eligibility for some government benefits in some cases. The reason for this is that any proceeds you receive from your loan that you don't spend right away (for example, if you opt for a lump sum instead of monthly payments or a line of credit) will count as an asset. And if your assets exceed program thresholds, you could be declared ineligible. If you receive or anticipate receiving Medicaid, consult a financial advisor to make sure the loan payout is structured to allow you to maintain your eligibility.
Danger #5: Paying Too Much
While fees for Home Equity Conversion Mortgages (which account for about 90% of all reverse mortgage business in the U.S.) are regulated by the federal government, those for jumbo reverse mortgages taken out on higher-value homes are not. Shopping with several lenders can help ensure that you get a fair deal on your mortgage. However, most instances of paying too much are the result of taking a reverse mortgage when another type of financing would be cheaper. For example, a home equity loan is probably a better bet for homeowners who need smaller loans.
Most seniors are happy with their decision to take out a reverse mortgage according to recent studies. Reverse mortgages can help ease financial burdens, allow seniors to remain in their homes, generate tax-free income, and help older homeowners avoid the expense of selling their houses and skip the hassles of moving. To be sure to avoid the dangers of reverse mortgages, take someone you trust with you when dealing with lenders, or consult with a financial advisor before committing to any mortgage loan .
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