If you’re in your sixties and own your home, chances are you have heard about reverse mortgages. Reverse mortgages allow you to tap the equity in your property. But they have risks and could be costly. Here are five tips you should consider:
1. Weighing your options
Whether you need money to pay bills or could use some extra cash, a reverse mortgage should be your last resort. Other options include selling your home and downsizing or renting. You can also take out a home equity loan or line of credit. If credit cards are the issue, you can consider consolidating that debt. If paying real estate taxes or house maintenance costs are the problem, look into local government assistance programs that could help. You have a lot of options. So ask your state agency on aging about lower-cost, less risky ways to fulfill your needs.
2. Understanding the costs, fees and risks
Even though you will not be making any interest payments as long as you live in your home, your interest rate matters. If you choose to move, you will have to pay back the reverse mortgage plus compounded interest. The same thing is true if you have to leave your home for more than twelve months. You should ask about all costs and fees which includes any prepayment penalties.
3. Recognizing the full impact of your decision
The income or lump sum you receive can affect your eligibility or your spouse’s eligibility for a variety of state and federal benefits. This includes Medicaid. It may not have the same home-equity protection that would otherwise apply if you have a health emergency and need to enter a nursing home that you can only pay for by liquidating assets.
4. Getting independent advice
Reverse mortgages are known to be complicated transactions. The federal government requires borrowers to meet with HUD-approved counselors prior to getting a federally guaranteed loan. You will need to confirm that any counselor recommended by your lender is truly independent. You could do this by asking whether he or she receives any funding from the lender or the mortgage industry.
While many loans are federally guaranteed, most lenders offer proprietary loans that are not. Even if you are applying for a proprietary loan, it is a good idea to get advice from a trusted financial adviser who has no interest in either the reverse mortgage or any investment you plan to make with the proceeds. Prior to agreeing to a reverse mortgage, you should consult with legal and tax professionals who know the consequences of reverse mortgages for residents of your state and who are not connected in any other way to the transaction or the lender.
5. Being skeptical of reverse mortgages
Be very skeptical if someone urges you to get a reverse mortgage to make an investment or buy an insurance product or a security. You should particularly do this if they are promising high returns. They are encouraging you to speculate with your home equity. You might need for more critical purposes down the road. If you cannot afford to get a low return or the loss of your home, you should not be investing with your home equity funds.
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