MYTHS ABOUT REVERSE MORTGAGES (HECM’S)
10 Reverse Mortgage Myths: Clearing Up
Common Misconceptions
Blog content updated 9/10/2021
You’ve heard them all: “It’s a scam.” “The bank takes your
house.” “Don’t do it unless you’re desperate.” But here’s the
truth about reverse mortgages:
They were created specifically for seniors to give them another
option to help improve their finances in retirement. And over the
years, more and more protections have been put in place that
make today’s reverse mortgages safer than ever.
The Home Equity Conversion Mortgage (HECM), commonly
known as a Reverse Mortgage, allows homeowners aged 62 (some proprietary loans offered to borrowers at least 55) and older to access the equity in their homes to help improve their cash flow and increase the longevity of their retirement assets. HECM loans are insured by the Federal Housing Administration, and all borrowers must get independent
counseling to make sure they understand their responsibilities
and get their questions answered.
To help you separate fact from myth regarding reverse
mortgages, we compiled the following list to help you better
understand the program as it stands today.
MYTH #1: The lender or government will take my home.
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 #2: It’ll just give me another monthly payment to
make.
FACT: A reverse mortgage does not require a monthly
mortgage payment as long as you meet the terms of your loan
which means you must continue to pay property taxes, home
insurance, homeowner’s association dues, and maintain your
home. . If you want to make payments to reduce the loan
balance, you can—but it’s totally up to you. The loan doesn’t
come due until the last borrower permanently leaves the home
or you do not meet the terms of the loan as noted above.
MYTH #3: My heirs will be responsible for the repaying the
loan.
FACT: Also false. A reverse mortgage is a type of loan called
“non-recourse.” This means that the lender can only get repaid
from the proceeds of the property sale—with any remaining
proceeds going to your heirs. If your the loan balance is higher
than your home’s value, your heirs won’t be liable for paying the
difference.
MYTH #4: I’ll have nothing left to leave my kids.
FACT: Not necessarily. As home values continue to increase,
it’s possible the value of your property will appreciate 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.
MYTH #5: I won’t be able to leave the home to my kids.
FACT: It’s true that typically, proceeds from the sale of the
home are used to pay off the reverse mortgage—but your heirs
do have the option to arrange to repay the loan and buy the
home if they wish to keep it in the family.
MYTH #6: I can’t qualify because my home isn’t paid off.
FACT: As long as you’ve built up enough equity in your home,
you can have a mortgage or other debt on your home’s title and
still qualify. The proceeds of the reverse mortgage must first be
used to pay off that mortgage or debt; in fact, a popular reason
to get a reverse mortgage is to pay off a current mortgage
without having to make monthly mortgage payments.
MYTH #7: I won’t be able to sell my home.
FACT: 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: I hear lots of people default or get foreclosed on
these loans.
FACT: Today, lenders must complete a financial assessment to
ensure borrowers will be able to meet their financial obligations.
If not, money may be set aside from the loan proceeds to pay
taxes, insurance to help borrowers meet the loan terms.
Implemented in 2015, these rules drastically reduced tax and
insurance defaults to just 0.39%, and “serious defaults” (a
broader term including foreclosures) to just 1.03%.2
MYTH #9: I’m afraid my spouse will be kicked out of the
house if I pass away.
FACT: The Department of Housing and Urban Development
has put additional protections in place to keep this from
happening. Eligible non-borrowing spouses can remain in the
home if the borrowing spouse has to move to a nursing home or
passes away, as long as they continue to meet the terms of the
loan.
MYTH #10: I need more cash flow, but I’m not desperate.
FACT: 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.
Here’s one last fact: unlocking financial freedom in retirement
starts with a proactive approach to financial planning—and
while it’s not for everyone, for many seniors a reverse mortgage
can be a useful part of that plan.
Is it right for you? There are many factors to consider, so
make sure to consult a trusted lender to explore your options.
Getting started is simple: the experts at Longbridge Financial
are experienced and prepared to help you achieve your
retirement goals—and if a reverse mortgage isn’t a good fit,
we’ll tell you.
Please call Jerry Peterson, Equity Access Funding LLC
239-290-4717
