Blog content updated 9/10/2021
You’ve heard them all: “It’s a scam.” “The bank takes your house.” “Don’t do it unless you’re desperate.” But here’s the truth about reverse mortgages:
They were created specifically for seniors to give them another option to help improve their finances in retirement. And over the years, more and more protections have been put in place that make today’s reverse mortgages safer than ever.
The Home Equity Conversion Mortgage (HECM), commonly known as a Reverse Mortgage, allows homeowners aged 62 and older to access the equity in their homes to help improve their cash flow and increase the longevity of their retirement assets. HECM loans are insured by the Federal Housing Administration, and all borrowers must get independent counseling to make sure they understand their responsibilities and get their questions answered.
To help you separate fact from myth regarding reverse mortgages, we compiled the following list to help you better understand the program as it stands today.
MYTH #1: The lender or government will take my home.
FACT: That’s just plain false. With a reverse mortgage, you or your estate continue to retain control of your home’s title. As with any loan, including a conventional forward mortgage, the lender simply puts a lien on the property to ensure the loan gets repaid.
MYTH #2: It’ll just give me another monthly payment to make.
FACT: A reverse mortgage does not require a monthly mortgage payment as long as you meet the terms of your loan which means you must continue to pay property taxes, home insurance, homeowner’s association dues, and maintain your home. . If you want to make payments to reduce the loan balance, you can—but it’s totally up to you. The loan doesn’t come due until the last borrower permanently leaves the home or you do not meet the terms of the loan as noted above .
MYTH #3: My heirs will be responsible for the repaying the loan.
FACT: Also false. A reverse mortgage is a type of loan called “non-recourse.” This means that the lender can only get repaid from the proceeds of the property sale—with any remaining proceeds going to your heirs. If your the loan balance is higher than your home’s value, your heirs won’t be liable for paying the difference.
MYTH #4: I’ll have nothing left to leave my kids.
FACT: Not necessarily. As home values continue to increase, it’s possible the value of your property will appreciate over your lifetime. Interest will accrue on the outstanding loan amount and be added to the balance. But the difference between the two (known as “retained equity”) is what may be available to leave for your kids.1
MYTH #5: I won’t be able to leave the home to my kids.
FACT: It’s true that typically, proceeds from the sale of the home are used to pay off the reverse mortgage—but your heirs do have the option to arrange to repay the loan and buy the home if they wish to keep it in the family.
MYTH #6: I can’t qualify because my home isn’t paid off.
FACT: As long as you’ve built up enough equity in your home, you can have a mortgage or other debt on your home’s title and still qualify. The proceeds of the reverse mortgage must first be used to pay off that mortgage or debt; in fact, a popular reason to get a reverse mortgage is to pay off a current mortgage without having to make monthly mortgage payments.
MYTH #7: I won’t be able to sell my home.
FACT: A reverse mortgage is like any other loan. If you sell your home, that reverse mortgage will be paid off at closing. There are no prepayment penalties for paying off or selling the home in advance.
MYTH #8: I hear lots of people default or get foreclosed on these loans.
FACT: Today, lenders must complete a financial assessment to ensure borrowers will be able to meet their financial obligations. If not, money may be set aside from the loan proceeds to pay taxes, insurance to help borrowers meet the loan terms. Implemented in 2015, these rules drastically reduced tax and insurance defaults to just 0.39%, and “serious defaults” (a broader term including foreclosures) to just 1.03%.2
MYTH #9: I’m afraid my spouse will be kicked out of the house if I pass away.
FACT: The Department of Housing and Urban Development has put additional protections in place to keep this from happening. Eligible non-borrowing spouses can remain in the home if the borrowing spouse has to move to a nursing home or passes away, as long as they continue to meet the terms of the loan.
MYTH #10: I need more cash flow, but I’m not desperate.
FACT: A reverse mortgage is much more than a last resort—more and more financial advisors are finding that it can be a flexible financial tool for retirement planning. You can choose to take the proceeds of a reverse mortgage as a lump sum, in monthly payments, a line of credit, or any combination of the three.
Here’s one last fact: unlocking financial freedom in retirement starts with a proactive approach to financial planning—and while it’s not for everyone, for many seniors a reverse mortgage can be a useful part of that plan.
Is it right for you? There are many factors to consider, so make sure to consult a trusted lender to explore your options. Getting started is simple: the experts at Longbridge Financial are experienced and prepared to help you achieve your retirement goals—and if a reverse mortgage isn’t a good fit, we’ll tell you. Call Longbridge Financial today at (855) 523-4326.
1. Consult amortization tables for details. Property value and ending loan balance subject to change. There is no guarantee there will be equity left for heirs.
2. New Data Shows Financial Assessment Reduces Reverse Mortgage Defaults, Reverse Mortgage Daily, 2/20/17. Accessed at http://reversemortgagedaily.com/2017/02/20/new-data-shows-financial-assessment-reduces-reverse-mortgage-defaults