Reverse Mortgage Myths And Misconceptions
Over the years, there have been many misconceptions and an overall lack of understanding about what reverse mortgages are, and how you can use them.
At Longbridge Financial, we’re committed to educating consumers about the many uses of this powerful financial tool. So we created this helpful Mythbusters section to help you separate fact from fiction. Read on to learn the truth about some of the most common reverse mortgage myths and misconceptions.
Someone told me the downside of a reverse mortgage is that the bank takes your home.
— Maria
That’s a MYTH: you own your home. Not the bank or lender.
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 name, as long as they keep current with property taxes, insurance, and home maintenance. 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 the last borrower dies or vacates the home.
Will you be able to pass on the home to your kids?
That’s TRUE: your heirs can inherit the home.
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
Can you be forced out of your home for not paying a reverse mortgage?
That’s a MYTH: it was designed to help people stay in their homes.
Reverse mortgages were created specifically to allow seniors to live in their home for the rest of their lives. Because the homeowner typically receives payments from a reverse mortgage—instead of making payments to a lender—the homeowner can never be evicted or foreclosed upon for non-payment. However, it is the homeowner’s responsibility to maintain the home in good condition, keep property insurance current, and pay property taxes.
I heard you shouldn’t get a reverse mortgage unless you’re desperate.
— John
That’s a MYTH: a reverse mortgage is a powerful tool—not a last resort.
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 paying off an existing mortgage to delaying social security, or even creating an emergency line of credit*, it’s a flexible product that gives you options. In fact, many financial planners have begun to discuss reverse mortgages with clients who need additional sources of retirement funding.
Will you still be able to get your Social Security and Medicare?
That’s TRUE: those benefits are generally unaffected by a reverse mortgage.
Government entitlement programs such as Social Security and Medicare are 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. Consult a qualified financial advisor or appropriate government agency to learn how a reverse mortgage may impact your eligibility for some government benefits.
Are there a lot of upfront costs with a reverse mortgage? Is it a rip-off?
That’s a MYTH: reverse mortgages don’t require large out-of-pocket expenses.
Mortgage loan origination costs and reverse mortgage 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.
Will I have to pay taxes on the reverse mortgage?
— Maria
That’s a MYTH: the proceeds are not considered income, and are not taxable.
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. Consult a financial advisor and appropriate government agencies for any effect on taxes or government benefits. To learn more about common reverse mortgage myths, click here.
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*Line of credit option is only available for adjustable rate HECM products.
