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A reverse mortgage can be a quick fix for your financial need and could also be a lifetime regret if done wrong.
For readers who are not too familiar with the term ‘reverse mortgage’, it is a type of loan approved with consideration of the borrower’s equity in a home property.
It is available for people who are at least 62-year-old and only fully due at the death of the borrower. This means, so far you reside in the home, there will be no payment due on the balance, unless you decide to move.
Below are some costly mistakes anyone getting a reverse mortgage loan should avoid as much as possible:
1. Borrowing more than needed
A reverse mortgage is not free money. Even though you are not mandated to refund it while alive, it comes with interest. Only access the money if you indeed need it such as to renovate your home.
The amount you can get from a reverse mortgage is dependent on your equity in the property which is invariably determined by the home value. Your age is another factor that is considered before your request can be approved. To avoid borrowing more than you need, do a complete evaluation of the purpose you need the money for, and then use the reverse mortgage calculator by All Reverse Mortgage to estimate how much you qualify for.
2. Getting a reverse mortgage immediately after a spouse’s death
There are no textbooks or guides on the right way to mourn your spouse. But there is a piece of advice by experts which states you should avoid making major decisions during this time; at least within the first 12 months.
If you need to get a reverse mortgage during this period, make sure you have your family support. This may save you from costly mistakes.
Also employing the service of a reverse mortgage specialist would help. The expert would help you research and secure the best deal for your purpose instead of falling for the marketing tricks of reverse mortgage companies.
3. Hiring the service of an inexperienced loan officer
The quality of the loan officer hired for the process will determine the kind of deal you get. Avoid dealing with experts who has no more than 20 reverse mortgages.
Experience comes with the job and the more deals closed by a loan officer, the better they are more likely to efficiently handle your deal. Also, hiring an expert who has been in the business for a long period gives an assurance that they will still be around in later years in case you have any issues.
4. Avoiding property tax and insurance
Continuous payment of property tax and insurance is mandatory to retain your home after securing a reverse mortgage loan.
Failure to do this will activate the violated clause in the loan document and the borrowed money would be due for payment even though you are still alive and won’t be moving out soon.
Borrowers who squandered the money borrowed with no other source of income to supplement are more likely to fall victim to this mistake. They are likely to lose their home as the lender may be forced to sell the property to the loan.
5. Neglecting interest rates
As stated earlier, a reverse mortgage comes with interest. The interest charged varies from company to company. This is why it is important to shop around before settling for a lender. While shopping around, you should also check their ratings with the Better Business Bureau (BBB) before settling for any. You can also look into the lender section at reversemotgage.org.
6. Not informing your heirs
In a case of death, heirs are not obligated to refund the reverse mortgage loan but the company is empowered to sell the property to recover their money. Heirs who are interested in the inheritance would need to pay off the balance of the loan before they can lay claim to it.
This is why you must inform your heirs about a reverse mortgage loan so that they won’t be caught unaware when all this unfolds.
7. Keeping it from your spouse
Not listing your spouse as a borrower in the reverse mortgage documents may also present a problem if you die before them. Likewise, if you are being moved to a nursing home, your spouse may be unable to continue living in the house.
The reverse mortgage clause only recognizes the borrowers while any other person not included is not considered. Once the loan is taken, it is impossible to add any more persons to it.
Discussing this with your spouse beforehand is important. You may purchase life insurance with your partner’s name as the beneficiary. This will help in offsetting the total refundable amount in case anything happens to you.