5 Mistakes Reverse Mortgage Borrowers Should Avoid

Borrower behavior before and after the loan can lead to avoidable mistakes

There are many pitfalls reverse mortgage borrowers can fall into, and most have nothing to do with the loan itself. Many of you, our viewers, have had a front-row seat watching reverse mortgage borrowers exhibit some of the strangest and most irrational behavior.

Personally, I’ll never forget the time I pulled up to a potential borrower’s home to find a brand-new RV parked in the driveway. They were in the application process to get a reverse mortgage but the loan was weeks away from closing and by far not a certainty. “When did you get the RV?”, I asked. “Just last week”, answered the husband. I came to learn they were counting on the proceeds of the reverse mortgage as if it was already money in the bank. I was mortified.

This brings us to the first mistake some reverse mortgage borrowers make: using the loan proceeds too quickly or all at once. While the adjustable-rate HECMs (Home Equity Conversion Mortgages) allow for borrowers to leave unused proceeds in what many call a line of credit, some borrowers immediately go on a spending spree with no thought of possibly needing those funds for a future health emergency or financial shock. This could leave the borrowers at risk of foreclosure if they end up without the funds needed to pay their required property charges.

However, beyond the wild-eyed spendthrifts, there are other potential pitfalls every reverse mortgage borrower should avoid.

The second mistake to avoid is rushing into the loan. While

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The Positive Realist September 25, 2023 at 7:11 am

Another potential mistake is to take a voluntary LESA.

For most HECM borrowers, life events could easily strip them of vital retirement assets, if any. So is the convenience of having someone else make property tax and homeowner’s insurance payments worth the risk of permanently losing a cash reserve of the same amount as the voluntary LESA? (Of course this assumes that the HECM is adjustable rate.)

On the other hand if the HECM is fixed rate and the unused principal limit, if any, is large enough to obtain a voluntary LESA, then in most cases taking a voluntary LESA will be very advisable. If the voluntary LESA leaves the HECM short to close then in some cases bringing cash in order to close the fixed rate HECM with a voluntary LESA may be advisable (since no cash reserve is being replaced and cash payouts in the future will be reduced).

So in most cases the advisability of taking or not taking a voluntary LESA should be based on whether the HECM is fixed rate or adjustable rate.

Kenny Minkel September 25, 2023 at 2:56 pm

Shannon / Ryan: How do I poet or share these weekly videos on my LinkedIn page? Please advise / respond at your convenience. Thanx

Shannon Hicks September 25, 2023 at 3:34 pm

Kenny- thank you for asking and for sharing. To share any HECMWorld content on LinkedIn follow these steps.

1. Copy the URL of the content from your browser’s address bar. For example, “https://hecmworld.com/reverse-mortgage-news/ilu-5-reverse-mortgage-mistakes-to-avoid/”.
2. Go to your LinkedIn feed and click the the area ‘Start a Post’. Here you would enter a short introduction and then paste the URL you just copied.
How to share to LinkedIn
Hope this helps!


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