Reverse mortgages can be a lifeline for homeowners aged 62 and older, offering much-needed financial flexibility during retirement.  However, like any financial product, their effectiveness depends on how wisely they are used.

For retirees, a reverse mortgage converts a portion of your home equity into tax-free loan proceeds. These funds can be used for essential expenses, such as covering medical bills, funding in-home care, or making home improvements to age in place.  Unlike traditional income, reverse mortgage proceeds aren’t subject to state or federal income taxes, giving homeowners added peace of mind.

While reverse mortgages can provide a steady cash flow, it’s important to use them thoughtfully. Careless decisions can put your financial security—and your home—at risk.  Whether you’re considering a reverse mortgage to supplement your retirement income or already have one, being aware of potential pitfalls is crucial.

Here are three common reverse mortgage mistakes to avoid to ensure you make the most of this retirement tool:

Mistake #1: Wasting Loan Proceeds on Non-Essential Purchases

Reverse mortgage loan proceeds provide homeowners with the freedom to meet a variety of financial needs in retirement.  Whether it’s covering medical bills, funding in-home care, or simply boosting your monthly cash flow, borrowers have complete control over how they use the funds.

However, this freedom comes with responsibility.  Spending loan proceeds on non-essential or extravagant purchases—like an expensive vacation or a new sports car—can jeopardize your long-term financial security.  Your home equity is a valuable resource meant to support your retirement, not a ticket to unnecessary indulgences.

Consider your future needs before splurging on big-ticket items.  If your savings can’t comfortably cover lavish expenses, it’s a clear sign that your home equity is better reserved for essential expenses, such as medical care, home improvements, or maintaining financial stability.

Spending down your home equity too quickly can leave you vulnerable to financial hardship later in life, especially if unexpected costs arise.  Using loan proceeds wisely ensures you’ll have the resources to enjoy a secure and comfortable retirement for years to come.

Mistake #2: Failing to Pay Property Taxes and Insurance

A common misconception about reverse mortgages is that they cover all homeowner expenses—but that’s not the case.  Borrowers are still responsible for paying property taxes and homeowner’s insurance. Failing to keep up with these payments can have serious consequences, including triggering the loan to become due and payable.

In the past, some borrowers mismanaged their loan proceeds or exhausted their savings, leaving them unable to afford ongoing property taxes and insurance.  This unfortunate mistake has led to financial hardships and, in some cases, the loss of their homes.

To prevent this, reverse mortgage lenders now conduct a financial assessment for all applicants. This assessment ensures borrowers can responsibly access their home equity while continuing to meet their tax and insurance obligations.  In some cases, borrowers may be required to establish a Life Expectancy Set-Aside (LESA), which reserves funds specifically for these expenses.

If you’re considering a reverse mortgage, ask your lender about LESAs and how they work.  Planning ahead for property taxes and insurance ensures you can enjoy the benefits of your reverse mortgage without risking your financial stability or your home.

Mistake #3. Not telling family members about your reverse mortgage

Like many financial decisions, getting a reverse mortgage is a decision that should not be made without thoughtful consideration.  While it is important to research reverse mortgages to be sure this product is right for you, it is equally important that they include family members in their plans.

A common mistake reverse mortgage borrowers make is not telling their loved ones about their loans.  Since the reverse mortgage loan balance becomes due after the last surviving borrower dies, it can be an unpleasant surprise for adult children when they receive a letter in the mail telling them that their parents’ reverse mortgage requires repayment.

The surprise can be even more unpleasant if the borrower’s heirs lived in the house with them and then found out that they must settle the loan balance following the death of their parents.  By simply conversing with loved ones about their plans to get a reverse mortgage, borrowers can easily avoid misunderstandings and make the proper arrangements for repaying the loan balance when the time comes.

Before getting a reverse mortgage, research to find out if this financial product is a good fit for your particular retirement plans.  If you’d like to learn more about reverse mortgages, contact us today for more information. 

Mistake #3: Not Telling Family Members About Your Reverse Mortgage

Getting a reverse mortgage is a significant financial decision, and it’s essential to involve your family in the process.  While researching reverse mortgages to ensure they align with your retirement goals is important, failing to share your plans with loved ones can lead to confusion and unintended consequences.

One common mistake borrowers make is not informing their adult children or heirs about the reverse mortgage.  Since the loan balance becomes due after the last surviving borrower passes away, families may be caught off guard when they receive notification that the loan must be repaid.  This surprise can be especially distressing if family members living in the home suddenly realize they must settle the loan balance to keep the property.

Open communication with your loved ones can prevent misunderstandings and help everyone prepare for the future. Discussing your decision ensures they understand your plans and allows them to make arrangements for repaying the loan balance, if necessary, when the time comes.

Before taking out a reverse mortgage, consider whether it fits your financial and retirement plans.  By including your family in the conversation, you’ll have peace of mind knowing your loved ones are prepared and on board with your decision.

If you’re exploring your options, contact us today for more information and guidance on how a reverse mortgage can work for you.

Have Questions About Reverse Mortgages?

All Reverse Mortgage, Inc. (ARLO™) is here to help.

• Access our online calculator: https://reverse.mortgage/calculator.
• Call Toll-Free at (800) 565-1722 to speak with an expert.

ARLO recommends these helpful resources: 

• CFPB: How do I know if a reverse mortgage is good for me?