How to Avoid Reverse Mortgage Problems

Reverse mortgages may seem like the perfect financial solution for some aging homeowners, but reverse mortgage problems can be serious and shouldn't be overlooked. When you're considering a reverse mortgage, look out for these potential problems:

Determine the Type of Reverse Mortgage You Need
Reverse mortgages can be used to address a variety of needs. It's important to determine how you want to use your reverse mortgage in order to avoid reverse mortgage pitfalls. Do you want a one-time lump-sum payout, or do you want to receive regular monthly payments to supplement your income? Figure out what you need from a reverse mortgage, and shop around for the reverse mortgage that best meets your needs. By narrowing down your needs, you can find a reverse mortgage that provides the right amount of income when you need it, and you may be able to avoid unnecessary fees and costs.

Beware of Exorbitant Fees and Interest
Because reverse mortgages are a somewhat exotic product, some reverse mortgage lenders charge high fees and interest. Shop around for reverse mortgage lenders with low fees and good interest rates; don't just take the first reverse mortgage lender who comes along. Look at the Total Annual Loan Costs disclosure document to determine how much you're really paying, and determine whether you want to go with a specific reverse mortgage lender. Keep in mind that up-front costs of a reverse mortgage will be high as well. Avoid rolling fees into the loan, if possible, as you'll have to repay them with interest when you terminate the reverse mortgage.

Look for an FHA Reverse Mortgage
Private lenders are responsible for most of the fee-related reverse mortgage pitfalls. If you want to reduce your concerns about fees, look for a reverse mortgage from the Federal Housing Administration (FHA), which is called a Home Equity Conversion Mortgage. FHA reverse mortgages are government-regulated, and you don't have to meet special income or credit requirements to qualify for them. You also don't have to worry about FHA reverse mortgages having a drastic increase in fees or interest during the life of the loan, and you won't get stuck with unexpected fees when the reverse mortgage is over.

Consider Government Benefits You May Receive
If you receive government benefits based on financial need, one of the unexpected reverse mortgage pitfalls isn't with the mortgage itself; it's with your government benefits. If you take a lump sum payout from your reverse mortgage and fail to spend it right away, the government may count it as an asset for determining your benefits. This may mean you'll receive reduced benefits from the government, and you may have trouble increasing your benefits even after you spend the payout. Consult a financial professional to determine how the reverse mortgage will impact your benefits.

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