Consumers are often confused about the concept of reverse mortgages and how they can benefit their financial well-being. Many misconceptions persist. Reverse mortgages are, in fact, an important financial tool that many retirees may find helpful as they map out their future. To help dispel the myths surrounding reverse mortgages, here are five common misconceptions:
Myth #1: The Bank Will Own My Home
Don’t worry. Even with a reverse mortgage, your home is still yours. This is still just a mortgage, much like any other mortgage you might be used to – except you aren’t required to make a monthly payment!
As long as you meet the loan requirements, you will retain ownership and keep the title to your home. And, contrary to popular belief, the requirements of the loan are very simple:
The home must be your primary residence (if you’re married, at least one person on the loan must live there).
You must maintain the home
You have to pay your property charges (homeowners insurance, taxes, HOA fees)
You must honor the terms of your loan documents
The only way you could lose your home (have the lender take action to call the loan due) is if you don’t follow these requirements.
Myth #2: The homeowner could get forced out of the home
The HECM reverse mortgage was created specifically to allow seniors to live in their home for the rest of their lives. The homeowner will not be evicted or foreclosed on as long as the borrower meets the obligations of the loan (as mentioned above). For example, the borrower must live in the home as their primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.
Myth #3: I Have a Mortgage so I Can’t Get a Reverse Mortgage
As long as you have equity in your home, you may still qualify for a reverse mortgage.
Even if you don’t think you have enough equity in your home, a reverse mortgage could be a great financial tool moving forward. We can help you determine what’s right for your situation. Statistics show that many homeowners over the age of 62 still have a mortgage and owe money on their primary residence. So, if you don’t own your home outright, you are not alone, and you may have options.
Myth #4: Reverse Mortgages Have Large Out-of-Pocket Expenses
Similar to any traditional mortgage, reverse mortgages do have costs and fees. The majority of these fees are the same fees you would pay for any mortgage. The good news is that you can roll most of them into the loan, which greatly reduces any out-of-pocket expenses. Many borrowers pay little to no fees out of pocket.
We can provide you with a detailed cost breakdown that explains the different interest and pricing options, closing costs, and fees, which can vary based on the loan type and size.
Myth #5: There won’t be anything to leave to My Children
With a reverse mortgage, you can still leave your home to your children. The title will pass to your estate. Heirs can choose to either keep the house by refinancing the existing mortgage balance or, if there is remaining equity, sell the home and keep what remains from the balance of the loan and the proceeds of the sale. Also, as home values continue to increase, it’s possible the value of your property will appreciate as much or more than the accrued interest over your lifetime. Interest will accrue on the outstanding loan amount and be added to the balance. But the difference between the two (known as “retained equity”) is what may be available to leave for your kids.
You always have the option to make elective payments to pay down or minimize the impact of the accrual of interest on your loan. These are non-recourse loans, and your heirs are protected from inheriting debt from the reverse mortgage.
Myth #6: Reverse Mortgages Are Only for Desperate People
A reverse mortgage is much more than a last resort—more and more financial advisors are finding that it can be a flexible financial tool for retirement planning. You can choose to take the proceeds of a reverse mortgage as a lump sum, in monthly payments, a line of credit, or any combination of the three. A reverse mortgage can be a true path forward in retirement and an empowering experience. People use reverse mortgages for a wide variety of reasons. The most common use is to pay off an existing mortgage. Some might use this tool to defer collecting Social Security or as a safety net for emergencies. Others use their home’s equity to enhance their life with greater flexibility and options in retirement.
MYTH #7: Once I have a reverse mortgage, I won’t be able to sell my home.
A reverse mortgage is like any other loan. If you sell your home, that reverse mortgage will be paid off at closing. There are no prepayment penalties for paying off or selling the home in advance.
MYTH #8: Someone can outlive a reverse mortgage
The reverse mortgage becomes due when all homeowners have moved out of the property for 12 consecutive months or passed away.
MYTH #9: Social Security and Medicare will be affected
Government entitlement programs such as Social Security and Medicare are usually not affected by a reverse mortgage. However, need-based programs such as Medicaid can be affected. It’s best to consult with a qualified financial advisor to learn how a reverse mortgage could impact eligibility of some government benefits.
MYTH #10: The homeowner pays taxes on a reverse mortgage
Generally, money received is not considered income and should be tax free, though you must continue to pay required property taxes. Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
Retirement is a time to realize a business idea, travel, help family members with education expenses, make charitable donations, or even use the funds for buying additional real estate. A reverse mortgage can be an effective tool to help add choices to your retirement years.
The more you know the real truths about reverse mortgages, the better you’ll be able to determine if one is right for your situation.