A reverse mortgage can be a lifeline for struggling seniors. It allows homeowners 62 and older to convert part of the equity in their homes into cash.
While the proceeds can help pay bills, reverse mortgages are not simple. For one thing, you have more responsibility. Take for example, homeowners insurance.
“The problem that some reverse mortgage borrowers have is that they are used to having their homeowner’s insurance collected with their mortgage payments. Many lenders actually add these insurance payments into the monthly mortgage payment (and hold them within an escrow account). They then disburse the money directly to the insurance company. But with reverse mortgages, borrowers aren’t making mortgage payments anymore, so the onus falls on them to maintain their insurance,” says Brian Simmons, CEO of Ask a Lender, an online platform that connects people, lenders and brokers.
Fall behind in insurance payments and lose coverage, and the lender could start default proceedings on you and you could lose the house, he warns.
Many people who choose a reverse mortgage have had their mortgage paid off for several years. Says Jason Hargraves, managing editor of insuranceQuotes.com, “If you minimized coverage to save money, you may have to change your current coverage to accommodate the new mortgage holder.”
Jenny Werwa, a spokeswoman for the National Reverse Mortgage Lenders Association in Washington, D.C., says borrowers are required to maintain the same amount of coverage they had at the time of closing on the reverse mortgage, and that may include hazard, wind, flood, condo or some combination of them.