Reverse mortgages are seen as a last resort with borrowers often thinking that it’s too good to be true. Despite what the critics would have you believe, there are plenty of reverse mortgage myths & misconceptions that should be dispelled to help borrowers make an educated decision.
A reverse mortgage isn’t right for everyone. But how can you make an educated decision if you don’t know all the facts or what it is that you’re trying to decide against? That’s why we’re here. This article will be your guide on dispelling those myths and helping you make an educated decision on whether a reverse mortgage can benefit your financial future.
- As long as the borrower fulfills his or her financial responsibilities, the homeowner will not be evicted or foreclosed on.
- A reverse mortgage does not require a monthly mortgage payment as long as you fulfill the conditions of your loan, which implies you must continue to pay property taxes, home insurance, and homeowner’s association fees, and maintain your house.
- With a reverse mortgage, you or your estate continue to retain control of your home’s title.
16 Reverse Mortgage Myths
There are many myths surrounding reverse mortgages that need to be busted! Let’s take a look at some common misconceptions about reverse mortgages:
Myth #1: Homeowners could be forced to leave their homes
FACT: The HECM reverse mortgage was created with the intention of allowing retirees to remain in their homes for the rest of their lives. As long as the borrower fulfills his or her financial responsibilities, the homeowner will not be evicted or foreclosed on. For example, the borrower must continue to reside in the home as a primary residence and pay property taxes, homeowners insurance, and maintain it according to FHA standards if there is a loan default occurs.
Myth #2: Social Security and Medicare will be impacted
FACT: Reverse mortgages are not linked to government entitlement programs such as Social Security and Medicare. However, need-based programs like Medicaid might be impacted. To understand how a reverse mortgage may affect eligibility for certain government aid, it’s preferable to consult with a qualified financial counselor.
Myth #3: It will cost you a lot of money out of pocket
FACT: The majority of lender closing expenses and fees may be financed into a reverse mortgage loan. Furthermore, many proprietary reverse mortgage loan programs do not require upfront closing costs or mortgage insurance premiums.
Myth #4: It’s possible you could outlive your reverse mortgage
FACT: The reverse mortgage becomes due when all homeowners have moved out of the property for 12 consecutive months or passed away.
Myth #5: That’s just another payment I’ll have to make each month
FACT: opens in a new windowA reverse mortgage does not require a monthly mortgage payment as long as you fulfill the conditions of your loan, which implies you must continue to pay property taxes, home insurance, and homeowner’s association fees, and maintain your house. You may make payments to reduce the loan balance if you wish; however, it is entirely up to you. The loan does not mature until the final borrower moves out or fails to comply with the terms of the arrangement stated above.
Myth #6: My home isn’t paid off, so I can’t qualify
FACT: You may have a mortgage or other debt on your home’s title and still qualify as long as you’ve accumulated enough equity in your property. The money from the reverse mortgage must first be used to pay off the existing mortgage or debt; in fact, many people use their reverse mortgages to pay off previous mortgages without having to make monthly payments.
Myth #7: Cash flow is a concern for me, but I’m not desperate
FACT: A reverse mortgage is far more than a desperate option—financial counselors are discovering that it can be a versatile financial tool for retirement planning. You have the option of taking the proceeds in one lump sum, in monthly payments, or as a line of credit.
Myth #8: If I die, my spouse will be thrown out of the house
FACT: The Department of Housing and Urban Development has taken additional measures to prevent this from happening. If the borrowing spouse is required to enter a nursing home or passes away, eligible non-borrowing spouses can stay on the property as long as they continue to fulfill the loan agreement.
Myth #9: A reverse mortgage sells the property to the lender
FACT: Lenders exist to lend money and get paid interest. The title to the property is in the owner’s hands. The lender adds a lien to the title so it can assure repayment of the money it lends.
Myth #10: I won’t be able to sell my house
FACT: A reverse mortgage is just like any other loan: You must make payments and pay down the principal balance, as with any other loan. When you sell your house at closing, the reverse mortgage will be paid off. There are no additional fees for paying off or selling the home early.
Myth #11: My heirs are responsible for repaying my loan
FACT: A reverse mortgage is a non-recourse loan. This implies that the lender can only recoup its money by selling the property, with any remaining funds going to your heirs. Your heirs will not be responsible for paying off the difference if the debt amount is greater than the home’s value.
Myth #12: Home won’t be inherited by heirs
FACT: The home passes to the estate, but there will be a lien on the title for the amount of the reverse mortgage loan, as well as any accrued interest and mortgage insurance premium.
Myth #13: The homeowner is taxed on reverse mortgage proceeds
FACT: Money received in most cases is not considered income and should be exempt from taxation, but you must still pay property taxes. For any tax or government assistance implications, contact your financial advisor and the relevant government agencies.
Myth #14: Many people default on these loans or have them foreclosed upon
FACT: Today, lenders must complete a financial examination to ensure that borrowers will be able to meet their financial obligations. If this is not the case, funds from the loan proceeds may be set aside to pay taxes and insurance in order for borrowers to fulfill their loan conditions.
Myth #15: My home will be seized by the lender or the government
FACT: That’s just plain false. With a reverse mortgage, you or your estate continue to retain control of your home’s title. As with any loan, including a conventional forward mortgage, the lender simply puts a lien on the property to ensure the loan gets repaid.
Myth #16: Reverse mortgages are similar to home equity loans
FACT: When the borrower is delinquent in property taxes or insurance, or under other specified conditions, reverse mortgage (deferred repayment) loans are due immediately. Home equity loans are made on a monthly basis with a set interest rate for a certain amount of time.
The Bottom Line
Like any type of loan, there are certain benefits & risks involved. The media also has a tendency to paint a broad stroke about the reverse mortgage with serious allegations which can be misleading. The key is to be able to separate the myths from the facts, to be sure you’re making an educated decision about your next steps.
The bottom line is that reverse mortgages exist to provide you with access to cash in exchange for equity in your home without having to sell or take out a loan against it. They are designed to make retiring easier; giving borrowers the option of staying put and happily aging in place. If you have any questions, just reach out to me via phone or the contact page. I’m always happy to answer any questions!