Reverse mortgages can be valuable retirement tools but must be used responsibly.  Like many other financial products, the effectiveness of reverse mortgages is only as good as the judgment of the borrowers who use them.

For homeowners age 62 and older, a reverse mortgage can provide an additional source of cash flow to supplement retirement savings.  With a reverse mortgage, borrowers receive the lender’s proceeds as their home equity.

These funds are considered loan advances, not income.  Because of this, they are not subject to state or federal income tax.  These loan proceeds can meet any borrower’s expenses, such as paying for medical care, in-home long-term care, or making home renovations to accommodate aging needs better.

It is entirely up to the borrowers for how they want to spend their reverse mortgage loan proceeds.  Although an infusion of funds can help support a comfortable retirement, retirees should be careful with how they use their home equity.

Here are some common mistakes to avoid when using a reverse mortgage to supplement your retirement income:

Mistake #1. Wasting loan proceeds on non-essential purchases

Reverse mortgage loan proceeds can be used to meet various spending needs in retirement.  Whether that means footing the bill for outstanding medical expenses or simply increasing your monthly cash flow, there is no restriction on how borrowers spend their loan proceeds.

It’s essential, however, that borrowers spend their loan proceeds wisely.  Home equity shouldn’t be used to go on a spending spree or to make impulse purchases that aren’t practical for your retirement plans.  Think twice before throwing down on that expensive vacation or new sports car.  If your savings fall short of covering such lavish expenses, take it as a sign that your home equity is better spent on more essential items or activities.

If you spend down your home equity too quickly, you may also put yourself at higher risk of running into financial troubles later down the road.

Mistake #2. Failing to pay property taxes and insurance

Reverse mortgage borrowers are responsible for the ongoing payment of their property taxes and homeowner’s insurance.  Although a reverse mortgage works differently than a conventional mortgage loan, both require borrowers to pay their property taxes and insurance timely.

A failure to continue paying these mandatory obligations will trigger the reverse mortgage to become due and payable, thus requiring the loan balance to be repaid.

In the past, some borrowers burned through all their savings and spent down all their reverse mortgage loan proceeds, leaving little left over to afford their property taxes and insurance payments, causing the reverse mortgage loan balance to become due and payable.

Thanks to recent regulations that took effect over the last year, reverse mortgage lenders now conduct a financial assessment of every loan applicant to ensure they can successfully tap into their home equity while still being able to pay the taxes and insurance associated with their properties.

Depending on your financial standing, you might be required to “set aside” the money to pay for these expenses through a “LESA” or Life Expectancy Set Aside.  Ask us for details.

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 find 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. 

ARLO recommends these helpful resources: 

• 4 Reasons A Reverse Mortgage May Be a Bad Idea
• Here are the Downsides of a Reverse Mortgage in 2024
• CFPB: How do I know if a reverse mortgage is good for me?