Reverse mortgages have been federally-insured and regulated products for 30 years. Nevertheless, this mortgage loan is still misunderstood, and often viewed as something to avoid. Many of the misperceptions stem from unregulated products of the 1960’s and 1970’s. But when used correctly, today’s federally-insured reverse mortgage is a very useful financial tool. Take a look at these 13 common myths surrounding reverse mortgages, and I believe you’ll learn a lot you didn’t know before.
Myth 1: You Have to Sign Your Home Over to the Bank
This is simply not true and is the most common reverse mortgage myth. If you obtain a reverse mortgage on your home, you retain ownership throughout the life of the loan. The home is still yours, and you can sell it at any time with no prepayment penalty. Even after you pass away, your heirs may sell the home or refinance the loan balance if they wish.
Myth 2: Reverse Mortgages Work Like any other Loan
Most loans have monthly repayment obligations after you get them. A reverse mortgage is special because repayment is not required until one of two things happens – you no longer live in the home as your primary place of residence, or you fail to meet the obligations of the mortgage (e.g. failure to pay property taxes and/or homeowners insurance). If you choose to make prepayments, it can behave like a traditional loan, but the flexibility is what makes it unique.
Myth 3: The Home must be owned “free and clear” to Get a Reverse Mortgage
It is true that the reverse mortgage has to be in a first lien position after closing, but the home does not need to be free and clear the time you apply for a reverse mortgage. In fact, most reverse mortgage borrowers are using a portion of the proceeds to pay off sizable mortgage balances at closing.
Myth 4: Only Elderly Widows Take out Reverse Mortgages
It is true that you have to be of a certain age to take out a reverse mortgage loan. In fact, one spouse must be at least 62 in order to qualify for this type of a loan. But you do not have to be widowed or elderly in order to qualify. There are many reasons that a single person or a couple may decide to get a reverse mortgage at age 62 for financial planning purposes.
Myth 5: Your Heirs Get Stuck with the Reverse Mortgage
Actually, a reverse mortgage loan is a non-recourse loan. This means that if you or your heirs choose to sell the home for any reason you can never owe more than the current market value of the house. In essence, there is no recourse for any deficiency. In fact, If your heirs want to keep the house, the most they would pay (or refinance) is the lesser of the loan balance or 95% of the home’s value.
Myth 6: Borrowers Use Their Money for Vacations
This is not inherently false. Borrowers may use their money for vacations, however it is more common that borrowers use the money for day-to-day expenses. The truth is that you can use the money you get from a reverse mortgage for anything. Initially, it is used to pay off your traditional mortgage liens. However, you can use the remainder to pay other bills, groceries, medications, etc. How you use it is truly up to you.
Myth 7: You Can’t Sell Your Home with a Reverse Mortgage
Remember, you own the home. Because you are the owner, you can sell your home whenever you want, with no prepayment penalty. When you sell your home, the loan is paid off in full. Because this is a non-recourse loan, there are some circumstances in which you or your heirs may not have to pay back the entirety of the loan. You can talk with your loan provider to learn more.
Myth 8: You Must Have Good Credit
Your credit and income are used to make sure the reverse mortgage is a sustainable solution for all household members. However, poor credit history or low residual income may simply mean that the lender will need to set-aside a portion of your proceeds to pay your property charges. As a result, credit history is less important than it may be when you apply for a traditional mortgage. Your age, the value of your home, and outstanding loan balances are still the most important qualifying factors with a reverse mortgage.
Myth 9: A Reverse Mortgage Should Only Be a Last Resort
It’s never truly wise to make any huge financial decisions in the midst of a crisis. In fact, a reverse mortgage loan often performs best when it is used as part of a well thought out financial plan. Many homeowners obtain reverse mortgages at age 62 when the funds are NOT needed so that they can be sure the funds are available when they are needed.
Myth 10: Reverse Mortgages are Expensive
Most mortgages have origination costs, third-party closing charges, and sometimes mortgage insurance premiums. With a reverse mortgage loan, you can pay for most of these costs as part of the loan. However, to determine whether a product is expensive, you need to consider what you are receiving in return. The reverse mortgage is a non-recourse loan that does not require monthly principal and interest repayment as long as you occupy the home and abide by program guidelines. This peace of mind is worth quite a bit. So, when used as a long-term plan for aging in place, the loan can be very inexpensive.
Myth 11: Reverse Mortgages are Scams
Occasionally, reverse mortgage loans end in foreclosure, even though the loan doesn’t require monthly repayment. This can occur when the homeowner fails to pay property taxes. This is an issue whether the homeowner has a traditional mortgage, reverse mortgage, or no mortgage at all. But this does not mean that a reverse mortgage itself is a scam. Scams have very low satisfaction ratings. By contrast, nearly 90% of reverse mortgage borrowers state that they are either satisfied or highly-satisfied with obtaining their reverse mortgage.
Myth 12: A Reverse Mortgage Means no More Equity in Your Home
Many believe that the reverse mortgage “eats away” or erodes a homeowner’s home equity. However, many reverse mortgage borrowers consume small amounts of their equity over time and see little change in their equity position. Some reverse mortgage borrowers actually gain equity with even 2% to 3% home value appreciation. Ultimately, the borrower decides how much of the remaining funds they wish to consume. Keep in mind, if at the time of repayment the loan balance is less than the home is worth, you, or your heirs, would receive the difference.
Myth 13: You Get Less from Social Security if You Have a Reverse Mortgage
No. The fact is that distributions from a reverse mortgage loan do not adversely impact your basic Social Security or Medicare. In addition, the proceeds don’t count as income and is therefore not taxable. For other government benefits that test for assets and/or income, you should consult your benefits administrator or financial professional.
A reverse mortgage loan, like anything financial product, is not right for everyone. You have to talk with a professional about your situation in order to find out if it is right for you.