Why it’s important
A reverse mortgage seems like a great deal at first glance. This type of loan provides a tax-free steady income to retirees and doesn’t need to be paid back until the borrower sells the property, moves out, or dies. As true as all of that is, there are also a number of pitfalls to reverse mortgages that aren’t obvious. The improper management of such a loan can result in an elderly borrower losing their most important asset, their home. With this in mind, I’ve done some research on the most immediate risks one should consider when thinking about committing to a reverse mortgage.
Scams and misinformation
The fact that this product is mostly aimed towards seniors and usually involves a large amount of money makes it a perfect storm for scammers and shady salesmen. It is common to see consumers being pushed into initiating a reverse mortgage to free up money for investments, paying for home improvements, or just enjoying their retirement years in luxury, without ever being filled in on the liabilities that come with the loan.
Fees and costs
The contract may contain hidden costs such as servicing and loan origination fees. In some cases, a reverse mortgage may result in a needlessly expensive way to access built-up equity.
Poor management of the funds
A large sum of money received without immediate consequences is, in lack of a better word, a huge temptation. It can be easy to spend it frivolously or lose it in reckless investments. Even more so, if the borrower chooses to receive the loan as a lump sum instead of installments.
Losing Primary residence status
One of the conditions in a reverse mortgage contract is that the borrower must use the property as their primary residence. If that changes at some point during the life of the loan, you may be subject to pay the entire outstanding balance or even lose your home to foreclosure.
Government Aid Eligibility
There are some government programs that evaluate their candidates through liquid assets, and getting money from a reverse mortgage (either as installments or a lump sum) may put a homeowner over the limit to be eligible.
Eviction of family or spouse
In the event of the borrower’s death, the entire balance of the loan becomes due. If the borrower’s name is the only one on the contract, the house can be sold to pay the debt and any family members who reside in the property are at risk of becoming homeless.
A reverse mortgage is not always a good idea, but it’s not always a bad one either. If you or a loved one are considering entering a reverse mortgage agreement, be sure to review the contract with a lawyer and have them explain all of the pros and cons. If the necessary precautions are taken, the risk of losing money or property due to a reverse mortgage is greatly reduced.