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Michael G. Branson, CEO of All Reverse Mortgage, Inc., and moderator of ARLO™, has 45 years of experience in mortgage banking, with the past 20 years devoted exclusively to reverse mortgages. A Forbes Real Estate Council member, he developed the industry's first fixed-rate jumbo reverse mortgage and has been featured in Forbes, Kiplinger, the LA Times, and Yahoo Finance. (License: NMLS# 14040) |
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Cliff Auerswald, President of All Reverse Mortgage, Inc., and co-creator of ARLO™ — the industry's first real-time reverse mortgage pricing engine — has 27 years of experience in mortgage banking, with 20+ years focused exclusively on reverse mortgages. A recognized expert in reverse mortgage technology and consumer education, he has been featured in Kiplinger, Yahoo Finance, Realtor.com, and HousingWire. (License: NMLS# 14041) |
Avoid These 3 Common Reverse Mortgage Mistakes to Protect Your Retirement
Reverse mortgages offer homeowners aged 62 and older a powerful tool to tap into home equity, providing tax-free funds for retirement. Whether covering medical bills, funding in-home care, or making home improvements, these proceeds can enhance financial flexibility—without the burden of state or federal income taxes. However, their success hinges on smart decision-making. Careless use can jeopardize your financial security and even your home.
Here are three common mistakes to sidestep, ensuring your reverse mortgage supports a comfortable retirement.
Mistake #1: Wasting Loan Proceeds on Non-Essentials
A reverse mortgage gives you the freedom to use funds as you see fit—think medical expenses, home care, or boosting cash flow. But this flexibility comes with a catch. Splurging on luxuries like lavish vacations or a sports car can drain your home equity, leaving you vulnerable when unexpected costs arise later.
Smart Move: Reserve equity for essentials. Before spending big, ask: Can my savings cover this? If not, prioritize needs like healthcare or home upgrades to safeguard your retirement.
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
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. Reverse mortgages can be a retirement lifeline, but they require careful planning. Avoid these mistakes to protect your home and financial future.
Common Reverse Mortgage Pitfalls
| Mistake | Risk | How to Avoid It |
|---|---|---|
| Wasting Funds on Non-Essentials | Depletes equity, risks future hardship | Prioritize essentials like healthcare, stability |
| Failing to Pay Taxes & Insurance | Loan becomes due, potential foreclosure | Plan ahead, consider a LESA |
| Not Informing Family | Confusion, unexpected repayment burden | Communicate openly with heirs |
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September 14th, 2016