[Content updated as of January 17, 2024]
The Home Equity Conversion Mortgage (HECM, pronounced heck´-um), commonly known as a reverse mortgage, is a secure and increasingly popular financial tool designed specifically for homeowners aged 62 and older. With a wide variety of uses and benefits, a reverse mortgage can effectively enhance cash flow and extend the longevity of assets throughout retirement years.
Let’s build a foundational knowledge by starting with some of the basics! Reverse mortgages work by allowing homeowners aged 62 and older convert a portion of their home’s equity into cash without having to sell the home or make regular monthly mortgage payments. Of course, as with any mortgage, keeping up with property taxes, insurance, and maintenance is required.
And, unlike a traditional mortgage where you must begin repaying the loan right away, you don’t have to repay funds received through a HECM until after a maturity event, such as when you no longer live in the home. Of course, as with any mortgage, keeping up with property taxes, homeowners insurance, and property maintenance is required.
Despite the rising popularity of reverse mortgages – over 1.3 million Americans have already boosted their financial peace of mind with a reverse1 – there are still prevalent myths and misconceptions about the loan program. Unfortunately, this misinformation often deters people from considering this valuable financial tool, preventing them from experiencing the peace of mind it could bring to their golden years.
Separating Fact from Fiction
Given the abundance of misinformation, it’s crucial you’re able to make an informed decision about whether a reverse mortgage makes sense for your unique goals and financial plan. To assist you in distinguishing between fact and fiction, we’ve compiled a list of the top 10 reverse mortgage myths and the facts behind them.
MYTH #1: The bank or lender will own my home.
FACT: Actually, the reverse mortgage program was designed to help you stay in and own your home longer2 – you or your estate will retain ownership of your home’s title, just like a traditional mortgage. Lenders are not in the business of owning homes – they wish to make loans and earn interest. The homeowner keeps the title to the home in their name2. What the lender does is add a lien onto the title so that the lender can guarantee that it will eventually get paid back the money it lends when the loan is paid off or when a maturity event occurs, such as when the last borrower dies or vacates the home.
MYTH #2: Getting a reverse mortgage means that I’ll have to take on monthly payments.
FACT: Quite the opposite! One of the key advantages of a reverse mortgage is that monthly payments are not required. As the borrower, you’re of course still responsible for keeping up with your property taxes, homeowners insurance, and property maintenance, as with any mortgage.
MYTH #3: My heirs will be responsible for repaying the loan.
FACT: A reverse mortgage is a “non-recourse” loan – which means you or your heirs will never owe the lender more than the home is worth at the time of its sale. Even if the loan balance exceeds the value of the home when the home is sold and the loan is repaid, your heirs won’t have to cover the difference.
Put simply, 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. Some arrange their own financing, pay off the loan, and keep the house for themselves. Many sell the house and pay off the balance, keeping any extra funds for themselves. And others opt to do nothing with the house and therefore deed it to the lender.
MYTH #4: I can’t get a reverse mortgage if my current mortgage isn’t paid off.
FACT: As long as you have enough equity in your home, and meet all other requirements, you can have a mortgage or other debt on your home’s title and still qualify. In that case, the proceeds from the reverse mortgage must first be used to pay off the existing mortgage or debt. In fact, many clients get a reverse mortgage specifically for this reason – to eliminate their existing mortgage and take advantage of optional monthly mortgage payments.2
MYTH #5: Reverse mortgage lenders really just want to sell your house.
FACT: You can stay in your home for as long as you want, as long as you meet the terms of the loan.2 If you decide to sell the home or move out, the loan would then become due. Reverse mortgage lenders do not want to sell your house, however, there are situations where the lender would be required to sell the home such as if you fail to meet the loan obligations, such as not paying property taxes or homeowners insurance. Additionally, if you have no heirs, the lender may sell the property to settle the debt after you pass away.
MYTH #6: If I get a reverse mortgage, I’ll have nothing to leave my children.
FACT: It’s very possible that the value of your property may grow over your lifetime. At the same time, interest will accrue on the outstanding loan amount and be added to the balance. If there’s equity left over after the loan is repaid (usually from the sale of the home), it may be available for you to leave to your kids.3 In addition, if a reverse mortgage is employed as a strategic part of your financial plan, in working with a financial advisor, you can avoid draining other invested assets. By using the power of your home equity to fund retirement expenses, you can allow other funds to grow over time and remain intact for your heirs.
MYTH #7: If I get a reverse mortgage, I can’t sell my home.
FACT: Yes, you can! As you would with a traditional mortgage balance, the proceeds from the sale of the home must first go toward paying off your reverse mortgage balance– so it’s important to understand how much you owe and how much you can expect to get from the sale. And there’s no penalty for paying off a reverse mortgage early.
MYTH #8: If my lender or servicer changes, my loan terms can change.
FACT: The terms of a reverse mortgage are set when the loan is originated and will remain the same throughout the life of the loan. This includes factors such as the loan amount and payment terms. Of course, with an adjustable-rate reverse mortgage, rates are expected to change over the life of the loan as part of the agreed upon terms. The terms of the loan by law cannot be changed, as long as the deeds remain in force. Even better? In addition to being a lender, Longbridge Financial is also a loan servicer, so you can expect a consistent relationship with us for the life of your loan.
MYTH #9: Reverse mortgages are expensive.
FACT: In reality, charges and expenses are applicable to every type of mortgage – and reverse mortgage loan origination costs and interest rates are comparable to those of traditional mortgages. There are FHA insurance costs that some traditional mortgages do not require, but they are relatively small. Typically, lender closing costs and fees can be financed into the loan, so there’s little required out of pocket.
MYTH #10: A reverse mortgage should only be used as a last resort.
FACT: When it comes to reverse mortgage loans, the fact is that they are a powerful financial tool that can be an important part of your overall financial plan. From improving your cash flow by paying off an existing mortgage to delaying social security for maximizing your benefits,4 it’s a flexible product that gives you options. In fact, many financial planners encourage their clients to consider a reverse mortgage as a retirement funding tool earlier rather than later – that’s the opposite of a last resort!
The first step to unlocking financial freedom in retirement begins with a proactive approach to financial literacy – by learning the truth about reverse mortgage loans, you’re already on your way. Because reverse mortgages aren’t right for everyone, there are many factors to consider that can help you determine if a reverse mortgage is the right move for you. But it’s always important to discuss any major financial decisions with loved ones and trusted advisors, too.
Knowledge is Power
When contemplating any financial tool, particularly one intended for retirement, it is crucial to grasp all the details. Armed with this new knowledge, you can more easily compare various home equity strategies with alternatives like refinancing or selling your home. And while the numerical details are crucial, it’s equally vital to keep the bigger picture in mind. Consider where you envision your retirement years. If you plan to stay in your current home for as long as possible, your home may need some modifications or updates to help you age in place more comfortably and safely. Funds from a reverse mortgage can help with home renovation expenses.
On the other hand, if you plan on relocating to a smaller home or one closer to loved ones, you can leverage a “reverse mortgage for purchase” to boost your buying power and land the home of your retirement dreams. Not many people realize that a reverse mortgage can be used to buy a new home, but this type of loan can help you accomplish two goals with a single transaction – buying a new home while securing a reverse mortgage – and still no required monthly mortgage payments!2 Many seniors like this option because it can help save money by reducing closing costs since a single loan is taken out. This can result in an easier and faster home buying process for all parties.
These scenarios are just two of the virtually endless ways you can utilize funds from a reverse mortgage. The power to change your future and secure the retirement you’ve been dreaming of is in your hands. And finding a reputable lender, like Longbridge Financial, that will be by your side every step of the way is crucial. Thankfully, we make it easy! To find out if you qualify for a reverse mortgage and decide if it’s right for you, contact our team to get started. Your future self will thank you!
