With the many misunderstandings about reverse mortgages I want to share seventeen facts to help clear up the misconceptions.
- A reverse mortgage is a mortgage just like any loan against the home where the borrower is using the equity of their home to meet their needs and desires now, but with special terms for seniors 62 and older.
- The lender or bank does NOT own the home – YOU OWN THE HOME, you keep the title! The lender or bank does NOT take your home when you die.
- Income and credit scores do not determine the interest rate. Interest rate is determined by the margin and the program chosen.
- No monthly mortgage payments are required. Borrowers are responsible for paying property taxes, hazard insurance, maintaining the property, paying HOA dues if applicable.
- The home does not have to be free and clear or have a lot of equity. Although enough equity is needed to pay off current liens and/or mortgages.
- There is no limitation on how the funds can be used. Some common uses include paying off a current mortgage, paying for home repairs or modifications, planning for retirement and long term care, home health care or adult day services, medical expenses, every day living expenses and even to purchase a home. Whatever one needs or wants.
- More options are available than with a conventional or home equity mortgage – Funds can be received in monthly payments structured as needed, line of credit (with a growth rate), lump sum, or a combination of these.
- Social Security and Medicare are not affected because it is a loan, and not considered income.
- Medicaid (Medical Assistance [MA] in Minnesota) can still be received with the reverse mortgage. (Your originator should know this and be able to assist you if or when you are going on Medicaid.)
- Borrowers can stay in the home as long as it is their primary residence, or in the case of a couple, as long as one borrower is still in the home as their primary residence, and they are abiding by the terms of the loan. The due date on the mortgage is the youngest borrower’s 150th birthday. Eligible non-borrowing spouses may be eligible for a Deferral Period.
- At the time of sale if the home is sold for more than the loan balance, the borrower(s) or their heirs receive the difference. The bank does NOT keep the difference!
- The loan is non-recourse which means there is no personal liability to the borrower or their heirs. This means borrowers or their heirs don’t have to come up with the difference if the loan balance is higher than what the home is sold (at fair market value). Borrowers are not leaving a debt to their children.
- Just like any mortgage, borrowers are responsible for property taxes and insurance, association dues (if applicable), maintaining the property and abiding by the terms of the loan.
- As borrowers use the funds/equity and are not making monthly payments the loan balance increases meaning because they used the money now, there will be less available when the loan is being repaid. (With a conventional mortgage one is using the equity but making monthly payments which repays the interest and a portion of the principal each month.) With the reverse mortgage, one has the flexibility to choose to make payments to reduce the loan balance, funds then become available to re-borrower in the future.
- Closing costs are comparable to a conventional mortgage – even though many times they are considered expensive or high they compare to conventional loans, in fact the difference comes down to the FHA Mortgage Insurance Premium. Fees are regulated and only HUD allowed fees are permitted with no mark-ups or junk fees. You can see a comparison of the costs in my article, “Surprise! Reverse Mortgage Closing Costs Actually Compare to Conventional Mortgage Costs” Note, there are no out of pocket costs except for the appraisal, possibly engineering inspections and counseling. The costs typically become part of the loan balance.
- FHA offers and insures through HUD the majority of reverse mortgages known as the Home Equity Conversion Mortgage or HECM, making it the most highly regulated mortgage available.
- HUD insuring the reverse mortgage provides advantages including:
- Guaranteeing the funds are available for you.
- Guaranteeing the lender against default or shortfalls
- Keeping the interest rates lower, the interest rates have historically been lower compared to other mortgages.
- Providing a line of credit growth rate (available only with reverse mortgages).
- Ensuring as a reverse mortgage it is a non-recourse (no personal liability) loan.
- Requiring counseling by a third party HUD trained and approved counselor.
- The HECMs are highly protected. See my Blog article “You Need To know Reverse Mortgage Borrowers Are Highly Protected.”
Before dismissing a reverse mortgage as an option, know the facts and talk with a reverse mortgage expert to see if one is right for your situation. Originators do not charge to meet with you and educate you on reverse mortgages. No product or service is right for everyone but with the facts you can make an informed decision.
Originally posted in 2011, updated in 2015.
© 2011-2015 Beth Paterson, Beth’s Reverse Mortgage Blog, 651-762-9648
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Blog posts’ information is current as of date post published, program is subject to change in in the future. Contact us for current information, 651-762-9648.
This site or the information provided is not from, or approved by, HUD, FHA, or any US Government or Agency.