Common Reverse Mortgage Mistakes to Avoid at All Costs

April 9, 2021

Reverse mortgages have become incredibly popular in recent years. IBISWorld estimates that homeowners will spend around $7 billion on reverse mortgages this year.

Although there can be a lot of good reasons to take out a reverse mortgage, there are also some ways that they can go very wrong. Is important to know how reverse mortgages work and avoid the most common pitfalls that you can encounter. Of course, you need to know the terms and conditions of a reverse mortgage, but you also need to know what other mistakes to avoid that aren’t spelled out in the contract. 

Here are some of the most common reverse mortgage mistakes that you will want to avoid.

Using a reverse mortgage to finance bad investments

One of the reasons that some seniors to turn to reverse mortgages is that they are not in good financial position during retirement. It might be tempting to try to use a reverse mortgage to purchase various investments during retirement.

Unfortunately, it is not really a good idea to use a reverse mortgage for investment purposes. Even if you are buying otherwise reliable investments, such as stocks or bonds, it might take years to realize a positive return from them, especially during an uncertain market. You will be taking an even bigger risk if you use a reverse mortgage to pay for riskier investments, such as penny stocks, REITs, cryptocurrencies or IPOs in unproven startups.

You should focus on using the proceeds from your reverse mortgage to fund the purchase of things that you actually need. You don’t want to lose all of the money from your reverse mortgage on investments at won’t be off during your lifetime.

Making expensive, frivolous purchases

Before you take out a reverse mortgage, you need to really ask yourself what the intended purpose is. Ideally, you should only use a reverse mortgage if you expect that you were going to have trouble meeting some of your important expenses. Reverse mortgages aren’t such great options if you are going to be making a lot of lavish purchases. Since 20% of seniors end up with major mortgages when they retire, you don’t want to be in the same boat. 

You might be tempted to think that reverse mortgages are free money, because you don’t have to pay them back on the same timeline as traditional mortgages. However, you have to keep in mind that you will be required to pay them back if you plan on moving. You might end up in a similar circumstance if you stop paying your property taxes or insurance.

Therefore, reverse mortgages should be taken out as a last resort to pay for important purchases. You should use them to cover the cost of food, medical bills that are not covered by Medicare or your supplemental insurance, car payments and other important expenditures.

You should be cautious about using money from reverse mortgages to purchase fancy cars, go on extravagant vacations or buy fine jewelry. If you do want to go on a trip, you need to be frugal about it and make sure your travel dollars last. You could end up between a rock and a hard place if you still can’t pay for your necessities down the road, especially if you have to pay back your reverse mortgage before you die.

Neglecting to tell your heirs about the reverse mortgage

One of the appealing things about reverse mortgages is that you don’t usually need to pay them off until you die, as long as you don’t plan on selling your home and continue to pay property taxes and homeowners insurance. It might be tempting to think that this means the money from the reverse mortgage is free.

Unfortunately, nothing is truly free. The loan is still going to need to be paid back. Assuming that you are still the owner when you die, your children or other heirs are the ones that will be required to pay back the loan.

You don’t want to leave your family blindsided by a reverse mortgage that they are not planning for. They might think that they are going to inherit their family home outright. They will feel greatly upset if they discover that you took out a reverse mortgage and they will need to pay it back after the probate process is finished.

Avoid making major mistakes when you are taking out a reverse mortgage

A reverse mortgage can be a convenient way to raise extra cash during retirement. However, it is important to make sure that you understand the consequences of the costly mistakes that you could make. You will want to avoid making the mistakes listed above. Use your money prudently and include your family in the decision.

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