When senior citizens find it difficult to lead their retired lives, they can take out reverse mortgages by using the equities of the homes they own. For many of those elderly homeowners, reverse mortgage is nothing short of a blessing. Knowing this many providers contact them via reverse mortgage leads, offering them excellent terms that they can hardly resist. Nevertheless, before signing a contract with any of these, it is important for every senior homeowner to understand the pitfalls of the process.
The High Costs
- Third Party Charges: These are closing costs that you pay up for the services offered by third parties. They include appraisal fee, title search fee, insurance, inspection fee, recording fee, survey charges, credit checks, mortgage taxes, pest infection fee, flood certification fee and so on. These can vary from lender to lender, and area to area.
- Origination Fee: This is a fee that you pay to your lender for processing your reverse mortgage. Although capped by FHA, this fee might vary from one lender to the other. The FHA cap could range between $2500 to $6000 depending upon the value of the home.
- Mortgage Insurance Premium: This is a fee that you pay for the FHA guaranteeing your loan. While this is mandatory in case of reverse mortgage, you could include it in your loan fund.
- Servicing Fee: This is the fee that you pay to your lender for servicing your HECM throughout the life. You will have to compensate your lender for sending you your account statements, making sure you pay up your insurance premiums and taxes, and for disbursing your loan proceeds. It would be well within $30 to $35 per month. This amount could be set aside by the lender at the time of closing and deducted from the available funds, added to your loan balance every month, or included in your mortgage interest rate.
The upfront costs associated in this process can amount to something substantial. Yet it works well if you are planning to stay in your house permanently. In case you are thinking about selling your home in the next few years, it is better you go for a home equity loan, a personal loan, or a traditional line of credit, instead of taking out a reverse mortgage.
Your family home may not be inherited by your heirs
Most of us would want to pass on our family homes to our next generation. But once you take out a reverse mortgage, your heirs will have to sell your home to pay back the loan, although the title would still be in your name. Nevertheless, there is an alternative to this. You could take out an insurance policy and nominate the lender or your adult child as your beneficiary. This means that your heirs will not have to sell your family home upon your death. Consult your insurance agent to make sure the proceeds of the policy would be sufficient enough to repay your reverse mortgage.
You may not get your Medicaid Benefits
Unless you structure your reverse mortgage carefully it could end up affecting your Medicaid payments. The lump sum amount that you receive by way of reverse mortgage proceeds would be considered an asset. So unless you spend this amount down, you may not be eligible to obtain those Medicaid payments. The best way would be to opt for monthly reverse mortgage payments and make sure you spend the amount that you receive in that month. This way it won’t count as a taxable income and will not affect your Medicaid benefits. The key is to not accumulate your savings. You could benefit by consulting your financial advisor or accountant with whom you can discuss the potential ramifications of reverse mortgage.
Once the house is sold the lender will not be entitled to charge your heirs anything more than the sale proceeds even if it is less than what is actually due. However, it is very important that you read the fine print of the reverse mortgage contract before you sign it up with a lender who comes to you via reverse mortgage leads.