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Myths of Reverse Mortgages

 

1. A reverse mortgage sells the home to the bank

Lenders are not in the business of owning homes — they wish to make loans and earn interest. The homeowner keeps the title to the home in their name. What the lender does is add a lien onto the title  so that the lender can guarantee that it will eventually get paid back the money it lends.

2. Heirs will not inherit the home

The estate inherits the home as usual, but there will be a lien on the title for the amount of the reverse mortgage loan plus any accrued interest and mortgage insurance premium.

For example, let’s assume someone takes out a reverse mortgage and owes $50,000 after 5 years. Then the homeowner passes away and the estate sells the house for $250,000. The lender gets $50,000 and the estate inherits $200,000.

A reverse mortgage is a “non-recourse” loan which means that the HECM borrower (or his or her estate) will never owe more than the loan balance or value of the property, whichever is less; and no assets other than the home must be used to repay the debt.  Non-recourse means simply that if the borrower (or estate) does not pay the balance when due rather it comes from the sale of the home or from loan proceeds of a refinance should the heirs choose to keep the home and need to take out of mortgage to do so.

3. 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.  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.

4. 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.

5. 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.

6. The homeowner pays taxes on a reverse mortgage

The proceeds from a reverse mortgage are not considered income and are not taxable. Consult a tax advisor for more information.

7. There are large out-of-pocket expenses

Typically, the majority of lender closing costs and fees can be financed into the reverse mortgage loan.

8. A reverse mortgage is similar to a home equity loan

A reverse mortgage and a home equity loan both use the home’s equity as collateral; however, there are also some differences.  For example,

Any homeowner can apply for a home equity loan. A homeowner must be at least age 62 to be eligible for a reverse mortgage.

A home equity loan typically must be repaid in monthly payments over 5 or 10 years. A reverse mortgage is typically not paid back until the homeowner moves out of the property for 12 consecutive months or passes away.

A home equity loan that charges no closing costs may have a higher interest rate over the life of the loan. A reverse mortgage charges upfront closing costs but generally has lower interest over the course of the loan.


 

Reverse Mortgage FAQS

 

 

Whats is a Reverse Mortgage?

A reverse mortgage is a loan available to homeowners, 62 years or older, that allows them to convert part of the equity in their homes into cash.

How can a Reverse Mortgage help me? 

The product was conceived as a means to help retirees with limited income use the accumulated wealth in their homes to cover basic monthly living expenses and pay for health care. However, there is no restriction how reverse mortgage proceeds can be used.

Why is it called a Reverse Mortgage? 

The loan is called a reverse mortgage because instead of making monthly payments to a lender, as with a traditional mortgage, the lender makes payments to the borrower.

How does the loan work? 

The borrower is not required to pay back the loan until the home is sold or otherwise vacated.  As long as the borrower lives in the home he or she is not required to make any monthly payments towards the loan balance. The borrower must remain current on property taxes, homeowners insurance and homeowners association dues (if applicable).

 

 

 

 

 
 

 
 

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