So, I don’t have to pay anything monthly? What’s the catch?
While a monthly principal and interest mortgage payment is not required, the homeowner is still responsible for paying other costs – namely their homeowners insurance premiums, HOA dues, and property tax bills. Reverse mortgage borrowers who struggle to make ends meet day-to-day may find it difficult to use their reverse mortgage proceeds to pay their living expenses as well as these financial obligations. It’s important to look at all revenue streams and consult with a financial advisor and/or tax professional to make sure that one will have the funds needed to cover monthly housing obligations.
If a borrower falls behind on their property taxes, insurance premiums or if they fail to maintain the home (the property must be kept safe for continued occupancy by the homeowner) the lender can call the loan due. If a borrower finds him or herself in this situation and cannot afford to pay the loan back, then foreclosure is a possibility.
Thankfully, in order to be approved for a reverse mortgage, the homeowner must agree to financial consultation from an FHA-approved reverse mortgage counselor. This helps protect the borrower from entering into a program that they may not be financially prepared for.
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Which is Less Risky – Lump Sum or Regular Payments?
Borrowers who opt to take out a lump sum are statistically more likely to face the risk of foreclosure. If a reverse mortgage borrower finds him or herself in a financially unstable position, they may have limited options after the lump sum of money runs out.
To prevent this situation, borrowers are encouraged to carefully examine their financial situation before applying for a reverse mortgage. Borrowers who make use of reverse mortgage proceeds as supplemental income rather than relying on it to pay for everything, are much more likely to enjoy financial security and a low risk of foreclosure.
Opting to receive regular payments instead of a lump sum is generally considered a less-risky choice; however, there is no such thing as a risk-free mortgage. Your best bet is to discuss your financial needs with a trusted financial counselor and request a free consultation with a reverse mortgage specialist in your area.