Removing the Myths behind Reverse Mortgages
For more than seven years, Purchase Reverse Mortgages have been available to consumers, ages 62 and older, to enhance and supplement retirement years. These loan products are unique compared to other loan products. As such, there are some misconceptions or myths associated with Reverse Mortgage loan option(s).
In an effort to help you better understand Reverse Mortgages, the following showcases some of the most common myths with an explanation of the truth.
Myth 1: A reverse mortgage transfers ownsership from the Borrower to the lender
Truth: Lenders provide mortgage services to their Borrowers—they lend money; they fund loans. The same holds true with a Reverse Mortgage. At the end of the term of the loan, the lender is entitled to be paid back. To ensure this takes place, a lien will be added to the title. With that lien, the lender will receive the loan pay back once the property is refinanced or sold. Moreover, the home owner retains the title of the property throughout the life of the loan, as long as the taxes and insurance associated with the property are kept current and the condition of the home is reasonably maintained.
Myth 2: With a reverse mortgage, heirs of the homeowner cannot inherit the home.
Truth: The provisions a homeowner(s) sets up in their estate as to who is the rightful heir of the property upon their death will remain in effect: a reverse mortgage does not change that. With a reverse mortgage, upon the passing of its youngest homeowner, the estate can sell the property but the lender must be paid back the loan amount in addition to any mortgage insurance premiums and interest due on the loan. Here’s an example:
Myth 3: The homeowner has no guarantee of staying in the home.
Truth: A reverse mortgage provides that homeowners, age 62 and older, can live in their home through the life of the loan, which extends to the 150th birthday of the youngest homeowner. As long as the property is maintained in reasonably good condition and the property taxes and insurance are paid current, the homeowner(s) will enjoy the benefits of home ownership. With a reverse mortgage, that means a lifestyle with NO MONTHLY MORTGAGE PAYMENT. In the event that the home must be sold, and the amount owed on the property exceeds the current market value, the homeowner is only obligated to pay back the lesser of the two, loan amount or value. Why? A reverse mortgage is a non-recourse loan. What does that mean? Even in the event that the loan balance exceeds the value of the home, the borrower is not personally responsible to pay back the shortfall. Here’s an example:
Myth 4: Entitlement to my senior benefits may be compromised with a Reverse Mortgage.
Truth: Government entitlement programs such as Social Security and Medicare are not affected by a reverse mortgage. However, need-based programs such as Medicaid can be affected. Consider contacting a representative from your local benefits office(s) for more information on your specific situation.
Myth 5: The Money a Borrower accepts from a reverse mortgage is taxable.
Truth: Although reverse mortgage proceeds seem like income to borrowers, money in the form of cash, income stream or a line of credit from a reverse mortgage is considered borrowed money and thus is not taxable income by the IRS. Please consult your tax advisor.
Myth 6: Reverse Mortgages come with a lot of upfront costs.
Truth: Like most consumer financing programs, there are costs associated with a reverse mortgage. The only upfront costs are for an appraisal (needed to assess the property’s current value) and for the mandatory HECM counseling session. All other closing costs (title, escrow, origination, taxes, insurance, MIP) are typically financed into the loan amount.
Myth 7: Reverse Mortgages come with a lot of upfront costs.
Truth: While a traditional home equity loan and the reverse mortgage line of credit are both ways to access equity that has built up in the home, there are a few significant differences. The Reverse Mortgage line of credit can never be frozen, reduced or cancelled if market conditions change (as long as program requirements are met: keeping current on taxes, insurance and home maintenance). Additionally, the reverse mortgage line of credit has a built in growth feature that can give a borrower access to their equity in the event that it increases. Please see additional differences below.