Avoiding Costly Mistakes
Shop Around:
The Reverse Mortgage is a very specific type of mortgage. You need to find a lender that specializes in this type of loan. You also want to make sure that the lender does not “dabble” in this loan but has done many of them. While the fees and costs are pretty much the same, the amount of time it takes you to get this loan closed will greatly vary. If you find a competent qualified lender you will save yourself a great deal of aggravation and time.
Not knowing your options:
Each person has a unique financial situation and needs. As such, you cannot be pigeon-holed into one type of loan. If your needs are not assessed correctly you may choose the wrong reverse mortgage. You may choose the wrong mortgage simply because the other options either were not discussed properly or not discussed at all. On the surface, this mistake may seem quite obvious to you, but the financial ramifications of knowing your reverse mortgage options can be huge. Make sure your loan officer thoroughly discusses multiple loans with you and how each can affect your financial position.
If you receive Medicaid or Social Security Insurance (SSI) benefits:
Income received from a reverse mortgage is not taxed and does not affect most Social Security or Medicare benefits. However, your Medicaid and SSI benefits may be affected if you don’t use your income from the reverse mortgage immediately. The money you keep in the bank is counted as an asset. As such, if you receive income from your reverse mortgage and it’s not used, you may exceed the maximum assets allowable. At that point you would be ineligible to receive these benefits. This is why seniors tend to choose to receive the reverse mortgage proceeds as a line of credit, because they can take money out on an “as needed” basis. Clearly, if money is taken out “as needed”, it would be spent immediately and not counted as an asset. You should consult with you financial advisor or your local Social Security/Medicaid office for further information and guidance.
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Selling Your House in a Short Time:
The reverse mortgage is an excellent solution to many financial situations, but not all. If you plan on selling your house within a short period of time, it may not make financial sense to obtain a reverse mortgage. As with any mortgage, there are closing costs. Because the closing costs are spread over the time period, the longer that you keep the house, the “cheaper” the loan becomes. The reverse mortgage is ideally suited for the borrower who wants to remain in the home for many years or who has no plans to leave the home. If you plan to move out of your home in less than three years, the costs associated with getting a reverse mortgage far outweigh the benefits. There may be cheaper alternatives that can accomplish what you need financially.
Be Aware of Cross Selling:
Some lenders have ties or principle interests in companies offering additional financial products such as annuities, stocks, and/or insurance. It is important that you do not get “pushed” into other financial products. You must make the proper decision. You should always obtain the input of trusted advisors to make sure that you are doing the right thing. Also, you can obtain the reverse mortgage from a lender that does not sell any other financial product. In that way you will not have to be concerned about this potential conflict.
Your Right to Cancel:
With most reverse mortgages (other than the HECM for purchase), you have at least three business days after closing to cancel the deal for any reason, without penalty. This is established by federal law. To cancel, you must notify the lender in writing. Send your letter by fax or certified mail, and ask for a return receipt. This is an important thing to remember, if for any reason, you have second thoughts that a reverse mortgage is not the right choice, or if you have concerns about the lender, the terms, or the fees. However, you should discuss this with your lender before sending the notice. If you send the notice, and then change your mind and decide to continue, some lenders may require you to start all over again.
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Know what you are Receiving:
Many lenders also want to make sure the home is kept in good condition and you should make sure to set aside some money to take care of basic upkeep of the home. Ask the loan officer what the lender’s policy is on maintenance and repair. You may want to take enough money up front to take care of future repairs so your monthly payment stays the same.
Include your Family in the Decision Process:
Don’t leave your family out of the process of getting a reverse mortgage, especially grown children. Try to get a consensus among your heirs prior to proceeding with the Reverse Mortgage, or at least include them during the education process. A reputable lender will welcome speaking with any of your family. Be aware that the loan and the process is confidential and that the lender can only speak with family members if you give permission.
Get Reliable and Professional Advice:
Consider discussing the benefits and disadvantages of reverse mortgages with your financial planner or real estate attorney. You can avoid reverse mortgage pitfalls if you have an impartial party clearly explain the ramifications.
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Beware of:
- Sales tactics involving the required or suggested purchase of annuities, other investments, long term care insurance, or other types of insurance policies with proceeds from the loan.
- Sales tactics involving contractors looking for proceeds to pay for home repairs.
- Being advised to transfer title to the property out of your or your spouse's name to qualify for the loan. Understand the legal consequences of title transfers.
- Being advised to have loan proceeds payable to third parties and not you as the borrower(s).
- Estate planning services that offer to refer you to a lender for a fee or percentage of the loan. You can obtain information on lenders from the Division of Banks and HUD at no cost.
Some Words of Advice:
- Obtain independent legal and other financial advice prior to signing loan documents. Discuss the loan with trusted family members;
- Know that reverse mortgage loans cannot have prepayment penalties or restrictions. Loans must be able to be prepaid in full or in part at any time without penalty;
- Understand your obligations under the loan, i.e., to pay taxes, insurance, and maintain the property in a satisfactory condition. Failure to fulfill these obligations may constitute a default and possibly lead to foreclosure action;
- Understand that over time the loan balance may increase and impact the accumulated equity in your property, leaving little or no reserve for potential unexpected expense such as health care and home repair.
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