Reverse mortgages have been a topic of debate since their inception, with contrasting opinions on whether they are a beneficial financial tool or a potential rip-off. While a reverse mortgage isn’t the right fit for everyone, it can be a game-changing retirement funding solution for many older Americans. It’s important to separate fact from fiction so you can gain a clearer understanding of reverse mortgages and determine whether they may be the right fit for your retirement. Let’s take a look at some common questions and their answers to get the full picture and set the record straight!
How do they work?
First, let’s explore how reverse mortgages actually work. A reverse mortgage is a specially designed loan for homeowners as young as age 55.1 The most common types of reverse mortgage is a Home Equity Conversion Mortgage (HECM) which is insured by the Federal Housing Administration. Other types of reverse mortgages are proprietary, like Longbridge Platinum.2 If you own a high-value home or condo, this proprietary, non-FHA jumbo reverse mortgage loan offers more cash than a standard reverse mortgage—depending on your home’s value, up to $4,000,000,3 with low costs.
With a traditional mortgage, homeowners make monthly payments to a lender to gradually pay off their loan. In contrast, a reverse mortgage of any kind allows homeowners to receive funds from the lender, effectively tapping into the equity they have built up in their home. These funds can be received in various forms, such as a lump sum, a line of credit, fixed monthly payments, or a combination of these options.4 In addition, no monthly payments are required with a reverse mortgage which can free up cash to cover other expenses or to build up your savings. You must of course continue to meet your loan obligations, including paying tax, insurance, and home maintenance costs.
Does the lender take my home?
One common misconception about reverse mortgages is that the lender takes ownership of your property. If this were true, that would certainly be a rip-off! The truth is lenders are not in the business of owning homes — they wish to make loans and earn interest. You retain ownership and keep the title to your home in your name just like a traditional mortgage, as long as you continue to meet the obligations of the loan, and it is repaid when you sell the property, move out of the home permanently, or pass away.
Will there be any inheritance left for my kids?
Critics of reverse mortgages argue that they can deplete the equity in a home, leaving little inheritance for heirs. While it is true that a reverse mortgage reduces the equity available in the home, it does not necessarily eliminate it entirely. In fact, government regulations require that homeowners are always entitled to any remaining equity in the property after the loan is repaid. This ensures that there is potential inheritance left for your heirs.
Your heirs inherit the house, just as they would with any other mortgage. When the loan comes due, they can decide what to do to repay the loan balance. They can arrange their own financing, pay off the loan, and keep the house for themselves, sell the house and pay off the balance, keeping any extra funds, or they can do nothing with the house and deed it to the lender.
Another way a reverse mortgage can be used to secure heirs’ inheritance is by using the proceeds from the loan to cover retirement expenses instead of depleting savings or other investments. The funds remaining in these other accounts can be left untapped, and may have grown over that time, offering an inheritance to any heirs.
Are they expensive?
Another concern often raised is the potential for high fees and interest rates associated with reverse mortgages. Mortgage loan origination costs and interest rates are comparable to those of traditional mortgages. With HECM reverse mortgages, there are FHA insurance costs that some traditional mortgages don’t require, but the overall benefits of the reverse mortgage are well worth the relatively small cost. Typically, lender closing costs and fees can be financed into the loan, so there’s little required out of pocket. Instead, it accrues over time and is added to the loan balance. This means that the interest is not a burden during your lifetime, but rather settled when the loan becomes due.
These costs are offset by the unique advantages they provide. For instance, unlike a conventional mortgage, a reverse mortgage does not require monthly payments, providing greater financial flexibility and peace of mind. You must of course continue to meet all loan requirements, including keeping current with property taxes, insurance, and maintenance. In addition, proceeds from a reverse mortgage are paid out income tax-free!5 The money from a reverse mortgage comes from your home’s equity, which already belongs to you, so it’s not considered income. Plus, the interest on a reverse mortgage can be tax-deductible when it’s repaid. We recommend consulting your tax advisor for more information.
Will I still be able to get my Social Security and Medicare benefits?
Government entitlement programs such as Social Security and Medicare are generally not affected by a reverse mortgage—however, need-based programs such as Medicaid may be. To stay eligible for Medicaid, you’d need to manage how much you take from the reverse mortgage per month to ensure you don’t exceed Medicaid limits. We recommend you consult your financial advisor or the appropriate government agencies to learn how a reverse mortgage may impact your eligibility for some government benefits.
Is a reverse mortgage right for me?
It’s important to note that reverse mortgages are not suitable for everyone. It is essential for you to carefully evaluate your own unique financial situation and goals before opting for a reverse mortgage. Consulting with a reputable lender, like Longbridge Financial, and a certified, third-party housing counselor can provide valuable insights and help you make an informed decision.
To determine whether a reverse mortgage is a rip-off or a beneficial option, homeowners should consider factors such as their current financial needs, long-term plans for their property, and their overall estate planning goals. For some seniors, a reverse mortgage can provide much-needed financial flexibility, supplement retirement income, or cover unexpected expenses. However, for others, alternative options such as downsizing, refinancing, or accessing other sources of income may be more suitable.
So, are they a rip-off?
Labeling a reverse mortgage as a rip-off is an oversimplification that fails to consider the individual circumstances and objectives of homeowners. While it is true that reverse mortgages, like any loan, come with specific terms, costs, and considerations, they can be a valuable financial tool when used responsibly and in alignment with your financial goals. It is crucial to thoroughly research and seek guidance from trusted professionals to determine whether a reverse mortgage is the right choice for your unique situation. Part of your research may include learning about others’ experiences with reverse mortgage loans to see how their lives have changed.
At Longbridge, we are proud to make customer service our highest priority. And we feel so strongly about going above and beyond to ensure your total satisfaction, that we’ve put our list of promises in writing. If you’re ready to take the next step or simply learn more about how you can use the power of your home to secure greater financial peace of mind, contact our team today!