5 Avoidable Mistakes Borrowers Make with Reverse Mortgages

Senior citizens are embracing the idea of reverse mortgages. How can you go wrong when the mortgage company pays you for the equity you have accrued in your home? However, there are many precautions to take before jumping in to this new type of mortgage program. Many borrowers make five major types of mistakes when using reverse mortgages.

According to the site Housingwatch.com , the minimum age for taking a reverse mortgage is 62. The homeowner must have either a small existing mortgage or be the owner of the house free and clear. The mortgagee must live in the home and the property must be a single family dwelling or a one to four multi unit apartment.

Other requirements to sign on for a reverse mortgage are that the borrower must receive information from an approved HECM (Home Equity Conversion Mortgage) counselor and the loan must be under $625,000.

Reverse Mortgage Mistake #1 - Not Shopping Around

Since seniors over age 62 are the only homeowners who qualify for reverse mortgages, they may make the mistake of not shopping around for the best rate. Retirees are often invited to free seminars at local restaurants and hotels for the sole purpose of "securing a worry free retirement".

These seminars are often run by questionable mortgage brokers who state that the way to a financially safe retirement is to take out a reverse mortgage. Potential reverse mortgage borrowers may also not know how to shop around via the internet and may only like to shop for financial products at their local bank, thereby not taking advantage of the lowest rates.

Reverse Mortgage Mistake #2 - Not Understanding Residency Rules

As stated earlier, one of the requirements of obtaining a reverse mortgage is that the borrower must live primarily in the property. Many seniors make the reverse mortgage mistake of not taking into account the possibility of having to move to a nursing home or assisted living facility. If the bank is aware that the house is not occupied by the mortgagee for more than twelve months, the total amount borrowed is due or the house can be sold.

Reverse Mortgage Mistake #3 - Reverse Mortgage Fees and Costs

Reverse mortgages require several fees and costs, which may not be fully disclosed until late in the process. According to reversemortgage.org , the costs of a reverse mortgage include origination fees, (6 to 10% or the mortgage amount), mortgage insurance premiums, appraisal fees and closing costs. These costs can be somewhat higher than the costs of a normal fixed rate mortgage.

Reverse Mortgage Mistake #4 - Scams

Due to the growing popularity of reverse mortgages, the number of dishonest mortgage salespeople and scam artists are increasing. Mortgagealmanac.com reported that the Department of Housing and Urban Development issued information to prevent senior citizens from being charged thousands over the normal amount for processing fees and HECM counseling.

Reverse Mortgage Mistake #5 - Overpaying Taxes

Many senior homeowners are not aware that they are exempt from taxes on the amount received from the mortgage disbursement. According to the Federal Trade Commission website (www.ftc.gov), proceeds from reverse mortgage payments made to homeowners from the mortgage company or bank are tax-free.

This mistake could change the amount that potential borrowers calculate as income from the mortgage. If the borrower accidentally pays the taxes to the government, it could take several months to obtain the money back.

Reverse mortgage mistakes can take away from a positive experience for senior homeowners experiencing financial difficulty. If properly researched and used responsibly, reverse mortgages can remove the barrier of money worries and create sustainable income in retirement.