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Home Ownership Preparation :: Reverse Mortgage Pitfalls
Reverse Mortgage Pitfalls:
Common Pitfalls Associated With a Reverse Mortgage
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Reverse mortgage pitfalls are all too common in an industry that sometimes preys on those who are desperate, in financial need or at their most vulnerable.
To learn about some of the most common pitfalls of reverse mortgages and how to avoid them, please keep reading.
How a Reverse Mortgage Works
Before you can explain the most common reverse mortgage pitfalls, you must first understand how a reverse mortgage works.
In contrast to a standard mortgage, reverse mortgages actually pay you, the homeowner.
Essentially, you turn your home equity into either a lump sum cash payment or a series of monthly payments. In exchange, the lender doesn’t collect on their loan until after you move or pass away.
As long as you continue to live in the home, you don’t have to repay the loan. However, should you move or pass away, you or your heirs will be required to pay the loan principal and interest, which is typically paid for through the sale of the home.
Reverse mortgages are targeted towards seniors over the age of 62 who own their homes outright and maybe want to use the money to pay down medical bills, take a vacation, or simply have access to an increased cash flow.
Reverse Mortgage Pitfall 1 –Origination Fees
Reverse mortgages can often end up costing more than a conventional loan or home equity loan. Because lenders don’t look at your credit rating or employment, you often don’t get a cut on the interest rate, but that’s just the start.
Often, there are “origination fees” associated with reverse mortgages. They can be as high as 2% of the property’s value and are probably one of the most expensive reverse mortgage pitfalls.
Reverse Mortgage Pitfall 2 – Other Closing Costs
According to the AARP, the average borrower pays about $15,000 in closing costs on a typical reverse mortgage.
So, if you’re thinking about using a reverse mortgage for a small amount of money or to pull out cash for an investment, it’s typically not a good idea.
Because of the high closing costs, reverse mortgages are best for seniors who want to pull out a large amount of money not intended for investment purposes.
Reverse Mortgage Pitfall 3 – Lost Equity
It’s important to remember that a reverse mortgage means you will lose all or a portion of your equity in your home. So, if you were planning to pass your home on to your heirs, a reverse mortgage may not leave enough of the home’s equity to do that.
How to Avoid Reverse Mortgage Pitfalls
The best way to avoid reverse mortgage pitfalls is to take full advantage of the mandatory counseling provided by HUD –trained counselors before you sign.
You see, all borrowers are required by law to undergo financial counseling before agreeing to a reverse mortgage – it’s up to you to make the most of it.
See also:
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Home-Ownership-Preparation.com :: Reverse Mortgage Pitfalls