Your home is your castle and if you’re like most of us, you want to remain in it as long as possible. If you’re a house-rich, cash-poor senior, a reverse mortgage can help you draw the equity from your home to spend as you wish.
- Are available to homeowners 62 or older.
- Have no monthly payments because the lender pays you.
- Cost significantly more than home equity loans and home equity lines of credit (HELOCs).
If you’re considering getting a reverse mortgage backed by FHA (and that’s 90% of the reverse mortgage market), you’re required to get financial counseling through the Home Equity Conversion Mortgage program (HECM).
While you’ll learn a lot at that counseling session, smart seniors also avoid four common reverse mortgage mistakes:
Mistake #1: Falling for Reverse Mortgage Scams
The U.S. Department of Housing and Urban Development was on track to guarantee about 59,000 reverse mortgages in 2013. The popularity of these mortgages makes potential borrowers a popular target for scammers.
Typical cons to watch out for:
The scammer “assists” you in getting a reverse mortgage but charges a fee that’s as high as the mortgage funds you’ll get. Show your tax advisor, attorney, or a housing counselor the deal you’re offered and ask if the fees your lender wants to charge are reasonable and normal.
You’re pushed to invest the money you get from the reverse mortgage in an investment or annuity. Seek advice from a trusted tax or legal advisor if anyone suggests you use a reverse mortgage to fund an investment.
They want you to pay a fee for “finding” a reverse mortgage. You do not have to pay fees to “find” a reverse mortgage. HUD publishes a list of approved lenders.
Identity theft. Thieves use your personal information to take out a reverse mortgage on your home. Watch for all types of identity theft by checking your credit report for free. Immediately question any new loans that appear on your credit report.
You’re offered a free lunch or dinner. Scammers know that once you’ve accepted a gift like a free lunch, you’re more likely to buy what they’re pitching. If you’re invited to a free dinner, that’s a clue you’re about to be pitched something that will cost you money.
Mistake #2: Thinking It Will Negatively Affect Other Benefits
Some homeowners avoid applying for a reverse mortgage because they’re afraid it will have a negative impact on Social Security or Medicare benefits. That’s not the case. Social Security is based on your work history. Medicare is the federal government’s health insurance program for the elderly.
A reverse mortgage is considered a “loan” rather than “income,” and as such it shouldn’t affect the benefits you receive from either agency.
Exceptions: If you receive Medicaid or Supplement Security Income (SSI), any leftover funds you don’t spend each month could count as an asset. Contact the Social Security Administration, your SSI administrator, a financial adviser, or an eldercare specialist about your specific circumstances.
Mistake #3: Counting on Your Condo
If you live in a condo, you might not be able to use the FHA reverse mortgage program. That’s because FHA only does condo loans for buildings that meet its guidelines.
FHA could also say no to your reverse mortgage if your condo:
- Doesn’t have enough reserves.
- Has a lot of owners behind on their condo dues.
- Has too many rental units.
If you live in a condo and want a reverse mortgage, check to make sure your condo is FHA approved.
Mistake #4: Ignoring the Alternatives
Because you’ll pay high costs and fees, a reverse mortgage should be as a last resort. Origination fees for a HECM depend on home value:
- Your fee is capped at $2,500 if your home is valued at less than $125,000.
- For a home valued at $125,000-$200,000, you’ll pay 2% of your home’s value.
- You’ll pay 1% of the value above $200,000.
- Overall, the origination fee is capped at $6,000.
You’ll also pay:
- Closing costs including surveys, inspections, appraisal, title insurance, recording fees, and credit checks.
- An upfront mortgage insurance premium of 0.10% or 2.5% of your home’s value (you’ll pay the higher fee for taking more than 60% of your home’s value in the first year of the loan).
- An annual mortgage insurance premium of 1.25% of the mortgage balance.
- A monthly service fee ($30-$35).
While you can roll these costs into your reverse mortgage instead of paying them at closing, the end result is less cash in your pocket and a bigger debt for your heirs, who must pay off your reverse mortgage lender if they inherit your house.
That’s why it’s critical to consider alternatives such as a HELOC, a personal loan, or perhaps even lifestyle changes like part-time work or housemates. FHA-approved counselors are supposed to discuss alternatives with homeowners seeking HECMs, but when the Government Accountability Office went undercover to find out if counselors were fulfilling this requirement, it discovered many weren’t. Seven out of the 15 counselors the GAO met with covertly didn’t discuss alternatives to reverse mortgages.