Are you 62 or older? Do you know someone who has a reverse mortgage? Do you have a reverse mortgage? Many people feel that having a reverse mortgage is a financial benefit. But, reverse mortgages can actually cause a lot of problems further on down the road. When a reverse mortgage is sold all the client sees is a clear sky ahead!
You may be asking yourself what exactly is a reverse mortgage. Well, a reverse mortgage is actually allowing a homeowner to convert part of their equity in their home into cash without having to ever make a payment on the loan. To a lot of seniors in financial need that probably sounds like a good idea. What could possibly be bad about that.? There are five big reverse mortgage traps.
According to US News website those big 5 traps are:Fees are often high. Since a reverse mortgage is a loan, you are going to have loan-related fees. Origination fees and other fees on a reverse mortgage are typically rather high. A reverse mortgage is a home equity loan that isn’t decided based on your income or your credit score. As a result, there are unique risks to the lender, and some of those risks are offset by charging higher fees at the outset.
2. High interest rate. The interest rate on a reverse mortgage is often higher than the rate for a more traditional home equity loan. Between the up-front fees on the reverse mortgage and the high interest charges, you might be surprised at how little money you actually end up getting. It’s your equity, but the bank gets an awful lot of it.
3. Your heirs might not get the house. When you get a reverse mortgage, you aren’t expected to make payments on the loan. Instead, the loan is paid off when you sell your home. So, if you die, the home is supposed to be sold so that it can cover the loan amount. This means your heirs can’t have the house. It is possible for your heirs to keep the house if they pay off the reverse mortgage after you die. However, this usually means that the money has to come out of the estate, reducing the total that your children and grandchildren end up with. For someone hoping to leave a legacy, this can be a real drawback.
4. You have to repay the loan when you move out. Dying isn’t the only way that repayment on a reverse mortgage is triggered. In order to avoid making payments on the loan, you have to be living most of the time in your primary residence. You are considered “moved out” if you haven’t lived in the home for a year. This includes if you enter a long-term care facility. So, if you are no longer able to stay in your home, but you haven’t died, you have to start repaying your reverse mortgage—at a time when money is likely already tight. This can put a real strain on your budget.
5. You’re still responsible for home costs. Throughout all of this, you are still responsible for your home costs. You have to pay property taxes, keep up with the homeowners insurance, and pay for regular maintenance on the home. If you have enough equity, you can get a reverse mortgage big enough to cover all these expenses, but it can be a difficult situation nonetheless.
According to the article titled As Reverse Mortgages Expand, Troubles Beckon For Heirs by Patricia Sabatini of the Pittsubrgh Post-Gazette, a reverse mortgage is a type of loan that allows homeowners age 62 and older to tap a portion of the equity in their homes. A reverse mortgage is a home loan. You will have home loan fees. It is not based on your credit score or how much you make. The interest rate is often higher then on a home equity loan. Adult children may keep the home only by paying off the loan or by paying 95% of the current appraised value of the house. Another common complaint is the shock of having to sell a home or face foreclosure when a spouse died because the surviving spouse’s name was not on the reverse mortgage. If you have not lived in the home for a year or have to go into a nursing home, you are considered “moved out.” You will then have to start repaying your reverse mortgage back. If you are not living in the home, you will still have to pay property taxes, homeowners insurance. You will still have to pay for regular maintenance on the home too.
Don’t forget that just because you own a home with a reverse mortgage, you still need to put in place proper death planning. What if you take it out then suddenly die? You would need something saying who would inherit and have the authority to discuss paying off the reverse mortgage with the mortgage company, or have the authority to sell your home. In Oklahoma that might mean a will. a revocable trust, or in some cases a transfer-on-death deed. Probate is avoided with a revocable trust and a transfer-on-death deed. And, you should also have powers of attorney and advance directives for medical and financial purposes to avoid a living probate.
These are just some of the reasons you should think twice before deciding to go with a reverse mortgage. If you are still uncertain on what to do, you may want to go talk to a conservative financial advisor and see what is recommended for you. They will help you decide on what is the best route for you to go. Brent D. Coldiron rarely recommends a reverse mortgage. It always favors the mortgage company to the client’s detriment. Most people are normally better off selling their home, investing the money with a solid broker, and paying rent.
An experienced probate and living trust attorney like Brent D. Coldiron,
knows what to do in these situations. His fees are reasonable. The best money ever spent is to get good legal advice before signing your name to something. Contact Brent at (405) 478-5655 or 737-2244. His website is Brent’s Website.