Are you interested in a reverse mortgage? Do you think that this is the answer to all your money problems? If so, you are not alone. But before you make this big financial decision, you need to know exactly what you are doing. By avoiding the most common reverse mortgage pitfalls you can put yourself in position for success without any regret.
The Five Biggest Reverse Mortgage Pitfalls To Avoid
1. Fees, fees, and more fees. Anybody who tells you that a reverse mortgage is “free” is lying. Even though you are more or less tapping into the equity of your home, the lender is going to get their share of the money. In most cases, an origination fee of approximately 2 percent is charged.
2. You may not be able to leave your home to your children. Many parents have the dream of passing their home down to the next generation. With a reverse mortgage this is much more complicated. The lender may not receive the title, but the person who owns the home is obligated to pay back the loan. Unfortunately, repayment is often times made by selling the home and using the money to pay back the lender.
3. Future financing issues. With a reverse mortgage you are agreeing to repay the loan with interest. Many people do not understand that this can negatively affect their ability to obtain financing in the future. Just because you don’t plan on buying another home does not mean you are in the clear. This can affect financing for a new car, credit card, etc.
This is one reverse mortgage pitfall that is often times overlooked.
4. The terms are not always in the best interest of the person applying for a reverse mortgage. For instance, some reverse mortgages have a special clause in which the loan must be immediately repaid if the property remains dormant for a particular amount of time. While not likely, this means that an owner who is away from home for an extended period of time, such as a hospital stay, could return to find their property in foreclosure.
Tip: to avoid this reverse mortgage pitfall, read the fine print and ask questions.
5. You may not qualify. Even if you are interested in a reverse mortgage you still have to qualify. Generally speaking, the more equity you have in your home the better chance you have of qualifying. This may not be a “traditional pitfall” but can be a major downer if you were counting on this method of receiving money.
It is important to be aware of and avoid these five common reverse mortgage pitfalls.