While the reverse mortgage can be a great financial tool, especially for retirees looking for a little more help with their cash flow, there are some pitfalls associated with these types of home equity loan. If you decide to get a reverse mortgage, you want to be careful to avoid the following pitfalls:
Forgetting a Reverse Mortgage Is a Loan
Because there are no regular payments, and because you are using the equity built up in your home, it is easy to forget that a reverse mortgage is a loan. This pitfall can lead to surprise and dismay when you find out that you are not getting as much money as you thought. Make sure to factor in loan fees (origination, appraisal, etc.), as well as interest charges, so that you are not wholly surprised at the amount of money that you get.
Moving Out
Many seniors decide to downsize, or find that they need the help of an assisted living facility. With a reverse mortgage, this means that your loan becomes due. Many do not realize this, thinking that the loan does not need to be repaid until death (and the sale of the home). As soon as you no longer live in the home, it is time to repay. Before getting a reverse mortgage, make sure that you are likely to be in your home for a while.
Not Getting an FHA Reverse Mortgage
Some lenders will offer you a loan even though you are 60 (and not 62). Be aware that such loans are not backed by the FHA, and do not have the same protections. Make sure that you are getting a FHA reverse mortgage to avoid some of the issues that come with this type of home mortgage.
Difficulty Getting Other Loans
Having a reverse mortgage can make it tough to get other types of financing. If you are planning on getting an auto loan soon, or applying for a credit card, it might be a good idea to hold off on getting a reverse mortgage loan.
Pressure to Invest
Double-check to make sure that your financial adviser is not working on commission. In some cases, you might have a mortgage broker or advisor who recommends that you get a reverse mortgage and then put the money on a risky venture. Since you are in retirement (or close to it) now is not the time to put your money in a high-risk investment ― no matter the potential reward. Instead, consider putting the money from your reverse mortgage into low-risk, income investments (like bonds or dividend stocks). However, you will need to be careful, since there is still risk involved. You should want to consult with a trusted investment advisor, tax professional, or financial planner with limited conflicts of interest.