Reverse mortgage can be a very important decision of your life and thus has to be made carefully. It is true that reverse mortgage provides senior comfortable living by regular income without leaving their house, but one should be aware of its pitfalls before going ahead.
Some of the major pitfalls on reverse mortgage are:
Taking reverser mortgage without clear objective and plan: This pitfall leads to two major problems:
- Borrowing more money that required: By doing this a borrower reduces its equity in home, when its actually not required. Remember, you are paying interest on the money you are getting – its not free money!
- Wasting money: When the borrower does not plan beforehand on what he will use the money for, the stream of sudden cash leads to wasting money. Some examples ca be buying un necessary financial products (insurance, for example), expensive home items, etc.
- Payments method: It is important to finalize payment method based on your needs and requirements. Some borrowers need lump-sum while others needs monthly and some others a credit line.
- Reverse mortgage is expensive: Just because the lender pays and does not asks borrower to leave, it does not mean it's a cheap product. Reverse Mortgage is one of the most expensive products to obtain money, primarily because of the costs associated and total payments you can get from it.
- Not planning for unexpected events: If a borrower does not plan for the above two pitfalls and then has to move out because of an unexpected reason say, for assisted living, it is likely he will lose his house as it will be sold off by the lender. Most of the borrowers forget that there might be situations where they may have to move out of the house and just because they over borrowed and spend excessively, they cannot move in the house again.
- Forgetting insurance / taxes and maintenance charges: Borrower should always remember that under the reverse mortgage contract, taxes, insurance and maintenance have to be taken care by him. Failing to do so can lead to the lender canceling the contract and selling the property.
- Registering both partners: One huge mistake a borrower can make is registering only one partner while borrowing. This is a big mistake as the second partner can be asked to leave if the registered partners move out for reasons such as assisted medical care of death. So, it is important to note that both the partners have to be listed to get all future benefits of their reverse mortgage
Many of the above points are clarified during counseling but it is best to have a knowledge of them before hand to ensure your reverse mortgage buying is perfect.