Myths and Truths about Reverse Mortgages

The following will help clarify if what you heard was a myth or the truth about reverse mortgages.

Reverse mortgage borrowers remain owners of the home - the bank does NOT own the home.Myth:  Borrower gives up ownership.
Truth:
  A Reverse Mortgage is like other mortgages where a lien is placed against the property but with the borrower maintaining ownership and the title remaining in their name. As with conventional mortgages, a Reverse Mortgage is a method of using one’s home as collateral to borrow money.

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Myth:  Borrower can lose their home because of a Reverse Mortgage.
Truth: 
Since monthly mortgage payments aren’t required, the risk of losing one’s home for not making monthly mortgage payments is removed. Although if one does not maintain insurance, keep taxes current, maintain the property, or adhere to the terms of the loan or the Reverse Mortgage can be required to be paid or face foreclosure.  This is true whether one has a reverse mortgage, conventional mortgage, or no mortgage at all, the county or city could foreclose when one doesn’t pay property taxes.

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Myth:  Home has to be completely paid off or have a low mortgage balance to obtain a Reverse Mortgage.
Truth:  Reverse Mortgage proceeds must equal enough funds to pay any existing debt tied to the home. If not enough is available, borrower must come up with the difference and then the Reverse Mortgage can still be done.  Funds to make up any difference must come from their own resources or a gift, funds cannot be borrowed to make up the difference.

"Affords methe ability to retire and makeends meet."The Reverse Mortgage improves cash flow because one doesn’t have to make monthly mortgage payments*. If one is unable to handle monthly loan payments of their mortgage or credit card payments, a Reverse Mortgage may be the solution. Or maybe one chooses not to make monthly payments any more. A Reverse Mortgage may be the solution for this situation also. Once the Reverse Mortgage pays off one’s current lien(s) or mortgage(s), there are no more monthly mortgage payments*.

Myth:  At the end of a certain period of time the borrower must move out of their home. Reverse Mortgage borrowers Borowers may stay in home as long as they wish
Truth: 
Borrower can stay in the home as long as it is their primary residence. The loan does not need to be repaid until they choose to move, sell, die, or on their 150th birthday.*

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Myth:  If all proceeds are used up, borrower(s) must move.
Truth:  Again, borrower can stay in the home as long as it is their primary residence, whether funds are available or not. The loan does not need to be repaid until they choose to move, sell, die, or on their 150th birthday.*

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 Myth:  If monthly payment plan is chosen, at a certain age the borrower won’t receive any more monthly payments.
Truth: 
If the tenure payment plan is chosen, as long as the home is the borrower’s primary residence, they continue to receive the monthly payments. If a term monthly payment plan (available with the HECM only) is chosen, when the term has ended, further payments won’t be received although they may stay in the home if it is their primary residence.*

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Myth:  With a Reverse Mortgage children can’t keep the home.
Truth:  The borrower may leave the home to whomever they choose. If children want to keep the home, they need to pay off the loan balance. Children have several options for paying off the loan, including refinancing the debt, using liquid assets, or selling home. After the loan is repaid, the home or the remaining equity would go to the heirs.
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Myth:  When the loan is repaid the lender will take ALL the remaining equity or the home.

Family can benefit from a reverse mortgage with peace of mindTruth:  Any remaining equity belongs to the borrower or their heirs after the loan balance is repaid. The amount of the loan balance to be repaid includes the financed closing costs, all cash advanced to the borrower over the length of the loan, servicing fees (if applicable), the accrued interest and accrued FHA Mortgage Insurance Premium (MIP).

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Myth:  When the loan is repaid the lender will own the home.

Truth:  As with a conventional loan, the lender does not own the home, a lien is placed against the home, using the home as collateral. The loan balance is to be repaid then any remaining equity belongs to the borrower or their heirs.

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Myth:  Senior needs to be cash poor and house rich before considering a Reverse Mortgage.
Truth:  Borrower does NOT have to be cash poor to do a Reverse Mortgage.  People often do the Reverse Mortgage, as with a conventional mortgage, to access the equity in their home now.  They are done for a variety of reasons from buying a car, home repairs, supplementing income or just having “more elbow room.”  Actually the reverse mortgage can be used as a tool for financial planning or long-term care planning or even purchasing a new home.

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House-shape-dividerMyth:  The interest rate is higher with a Reverse Mortgage than with a conventional mortgage.
Truth:  The interest rate is usually lower than what seniors can qualify for with a conventional mortgage, especially with the adjustable rate. The initial interest rate on the HECM adjustable rate program (the most common Reverse Mortgage program) is based on the LIBOR (London Inter-Bank Offered Rate).  With a conventional mortgage, the rate is impacted by one’s income, assets and credit scores.  With the reverse mortgage the interest rate is not affected by these factors but by the program chosen.  However, borrowers income and credit are used for a financial assessment to determine ability and willingness to pay property taxes, insurance, HOA dues if applicable. Often those on a fixed income do not qualify for a conventional mortgage or a Home Equity Loan.

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House-shape-dividerMyth:  Closing costs are high.
Truth: 
This is a perception, the closing costs are the same as a conventional or “forward mortgage” plus the FHA Mortgage Insurance Premium if one is doing a HECM.  The costs are regulated by HUD.  Being the closing costs are taken out up front as part of the loan balance, this gives the perception of being high.

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Myth:  Borrower could outlive the Reverse Mortgage.
Truth:  The loan is not required to be repaid until the home is no longer their primary residence or on their 150th birthday.  Borrower must abide by the terms of the loan or the loan could be called due and payable.
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Supplement retirement with a reverse mortgageMyth:  If some equity is not reserved, borrower could be left with little or no assets after paying off the loan.
Truth:  Borrower may choose to use the assets now to their advantage rather than later.  Borrower could still have equity depending on how long the reverse mortgage is in place and/or if home values increase more rapidly than the loan balance rises over time.
To clarify the myths from the truths call:
Reverse Mortgages SIDAC

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