When it comes to reverse mortgages, you’ve heard it 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 designed specifically for seniors as an option for improving their finances in retirement. And, over the years, lenders have implemented more protections that have made today's reverse mortgages safer than ever.
The Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, allows homeowners (ages 62+) to access the equity in their homes to:
- Help improve cash flow
- Increase the longevity of retirement assets
HECM loans are insured by the Federal Housing Administration (FHA), which requires all eligible individuals on the loan to take independent counseling. This helps ensure they understand their rights and responsibilities and have their questions answered before deciding.
To help clear up some of the outdated information that exists on reverse mortgages, we put together a few misconceptions and truths that will help you better understand modern reverse mortgages and how they work today.
Myth #1: The Lender or Government Will Take My Home
If you fulfill the terms of the mortgage, this is just plain false. With a reverse mortgage, you or your estate continue to retain control and remain on the title of the home. As with any loan, the lender simply puts a lien on the property to ensure the loan gets repaid. In this way, it's no different than a traditional mortgage.
Myth #2: A Reverse Mortgage Just Gives Me Another Monthly Payment to Make
A reverse mortgage does not require a monthly mortgage payment as long as you meet the terms of your loan, which include:
- Reside in the home as your primary residence
- Pay property taxes, home insurance, and homeowner’s association dues
- Maintain your home
If you want to make payments to reduce the loan balance, you can — but it’s totally up to you. The borrower only needs to repay the loan when they permanently leave the home. If you do not meet the terms of the loan mentioned above, you will also need to repay it.
Myth #3: My Heirs Will be Responsible for Repaying the Loan
This is 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. You and your heirs aren’t personally liable if the loan amount exceeds the home value when the home is sold and the loan is repaid.
Myth #4: I’ll Have No Money Left to Leave My Kids
This is not necessarily true. As home values continue to increase, it’s possible (even likely) that 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 current value and loan balance (known as “retained equity”) is what will be available to your children or heirs.*
Myth #5: I Won’t be Able to Leave the House to My Kids
This is another misconception that's not necessarily true. Typically, proceeds from the sale of the home are used to pay off the reverse mortgage — but your heirs do have the option of repaying the loan and buying the home if they wish to keep it in the family. If your home has a reverse mortgage, your heirs or children will need to contact the lender/servicer within 30 days of your passing.
Myth #6: I Can’t Qualify Because My Home Isn’t Paid Off
If 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.
If this is the case, first, you must use the proceeds of the reverse mortgage to pay off your existing 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
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: Lots of People Default or Foreclose on Reverse Mortgages
The mortgage industry is highly regulated. Today, lenders must complete a financial assessment to ensure that borrowers will be able to meet their financial obligations. If they don’t initially meet the loan terms, money may be set aside from the loan proceeds to pay taxes and insurance — allowing the borrowers to meet the loan terms.
After they were implemented in 2015, these regulations drastically reduced tax and insurance defaults to just 0.39%, and “serious defaults” (a broader term including foreclosures) to just 1.03%.** So, the majority of reverse mortgages (nearly 99%) will not end in foreclosure.
Myth #9: With a Reverse Mortgage, My Spouse Will be Kicked Out of the House if I Pass Away
The Department of Housing and Urban Development (HUD) has put additional protections in place to prevent this from happening. Eligible non-borrowing spouses can remain in the home if the borrowing spouse moves to a nursing home or passes away, if they continue to meet the terms of the loan.
Myth #10: Reverse Mortgages Are Only for People in Desperate Situations
A reverse mortgage is much more than a last resort. More and more financial advisors are recommending a reverse mortgage as a flexible financial tool for retirement planning. Even if you have a stable financial picture, a reverse mortgage can be an ideal way to increase your monthly cash flow.
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 those three options.
One Last Thing...
Unlocking financial freedom in retirement starts with a proactive approach to financial planning — and while it’s not for everyone, a reverse mortgage can be a useful resource for many seniors.
Is a Reverse Mortgage Right for You?
With so many factors to consider, it’s important to consult with a trusted lender to explore your options.
Getting started is simple: the experts at Waterstone Mortgage 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.
Get in touch with a trusted Reverse Mortgage Specialist at Waterstone Mortgage to see if you might qualify for a reverse mortgage. It’s our goal to help senior citizens create a more financially stable and secure retirement.
*Consult amortization tables for details. Property value and ending loan balance subject to change. There is no guarantee there will be equity left for heirs.
**New Data Shows Financial Assessment Reduces Reverse Mortgage Defaults, Reverse Mortgage Daily.
These materials are not from HUD or FHA and were not approved by HUD or a government agency.
The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage (HECM), and is only available through a Federal Housing Administration (FHA)-approved lender. Not all reverse mortgages are FHA insured. When the loan is due and payable, some or all of the equity in the property that is the subject of the reverse mortgage no longer belongs to borrowers, who may need to sell the home or otherwise repay the loan with interest from other proceeds. A lender may charge an origination fee, mortgage insurance premium, closing costs and servicing fees (added to the balance of the loan). The balance of the loan grows over time and you are charged interest on the balance. Borrowers are responsible for paying property taxes, homeowner’s insurance, maintenance, and related taxes (which may be substantial). There is no escrow account for disbursements of these payments. A set-aside account can be set up to pay taxes and insurance and may be required in some cases. Borrowers must occupy home as their primary residence and pay for ongoing maintenance; otherwise the loan becomes due and payable. The loan also becomes due and payable (and the property may be subject to a tax lien, other encumbrance, or foreclosure) when the last borrower, or eligible non-borrowing surviving spouse, dies, sells the home, permanently moves out, defaults on taxes, insurance payments, or maintenance, or does not otherwise comply with the loan terms. Interest is not tax-deductible until the loan is partially or fully repaid.
