5 costly reverse mortgage mistakes

Taking on a reverse mortgage can be a smart move or a financial disaster, depending on the type of loan and your circumstances. Avoid these mistakes to make a reverse mortgage a smart move.

Mistake #1: Taking out the wrong mortgage

What’s the best mortgage for you? The one that accomplishes your objectives at the lowest cost. Here, in order of cheapest to most expensive, are home equity financing options for seniors.

• 1. Single purpose reverse mortgage: This loan is available to very low-income seniors and costs little or nothing. It may provide a limited amount of funding for home maintenance or property taxes.
• 2. Home equity loan or line of credit: You have to have good credit and sufficient income to cover monthly payments, and if you do, these loans are very cheap to obtain.
• 3. Home Equity Conversion Mortgage (HECM) Saver reverse mortgage: This is a lower-cost option for those seniors who want to cash out a smaller percentage of their home’s equity.
• 4. HECM Standard reverse mortgage: These loans come with fairly high upfront charges but allow you to cash out a larger portion of your home’s equity.
• 5. Jumbo reverse mortgages: These loans are less regulated, so you need to shop carefully, but they allow people with high-end homes to get larger loans than HECM regulations allow.
• Mistake #2: Not considering your future

Reverse mortgages are characterized by one thing: you don’t make payments on the loan as long as you own and live in your home. However, the definition of “living in the home” can vary from lender to lender. So if you are planning a jaunt around the world or your health is less than optimal, a reverse mortgage may not be for you. The high upfront cost associated with some reverse mortgage programs means that they can be very expensive if you don’t keep your loan for a long time.

In addition, some couples play a risky game when they remove the younger spouse’s name from the home’s deed so that they qualify for a bigger loan (your maximum loan amount is determined by the age of the youngest borrower as well as interest rates and the home’s value). When the older spouse dies or moves out (for example, to a nursing home), the younger one can unexpectedly end up homeless.

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