Reverse Mortgage Facts
For years there have been several misconceptions and an overall lack of understanding regarding the facts and uses of a reverse mortgage. At Longbridge Financial one of our primary goals is to educate consumers about the many uses of this powerful financial tool.
The Bank/Lender does not own your home
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. 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.
Heirs can still inherit the home
Your heirs inherit the house, just as they would with any other mortgage, and 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; 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.
A Reverse Mortgage is NOT just the loan of last resort
A reverse mortgage is a powerful financial tool and can be a very 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, the reverse mortgage is a highly flexible product. In fact, with recent changes to the product and the security of the U.S. Department of Housing and Urban Development’s FHA insurance, many financial planners have begun incorporating the reverse mortgage into retirement income discussions.
Homeowners can’t get forced out of the home for not paying the reverse mortgage
The HECM reverse mortgage was 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 on for non-payment. However, it is the homeowner’s responsibility to maintain the home in good condition, keep property insurance current, and pay the property taxes.
Homeowners can’t outlive a reverse mortgage
The reverse mortgage becomes due when all homeowners have moved out of the property for 12 consecutive months or passed away.
Social Security and Medicare will generally not be affected
Government entitlement programs such as Social Security and Medicare are not affected by a reverse mortgage. However, need-based programs such as Medicaid can be affected. To remain eligible for Medicaid, the homeowner needs to manage how much is withdrawn from the reverse mortgage in one month to ensure they do not exceed the Medicaid limits. You should consult with a qualified financial advisor to learn how a reverse mortgage could impact eligibility of some government benefits.
Homeowners do not pay taxes on a Reverse Mortgage
The proceeds from a reverse mortgage are not considered income and are not taxable. Furthermore, the interest on reverse mortgage can be tax deductible when it is repaid. Consult a tax advisor for more information.
There are NOT large out-of-pocket expenses
Mortgage loan origination costs and interest rates are typically comparable to standard conventional mortgage costs and rates. There are FHA insurance costs that some traditional mortgages don’t have, but the insurance benefits are well worth the small cost. Typically the majority of lender closing costs and fees can be financed into the reverse mortgage loan so little is required out of pocket.
A reverse mortgage is similar to any other mortgage in many ways
Like a traditional mortgage
- Homeowner maintains title and ownership
- Homeowner is responsible for taxes, insurance and maintenance
- Loans are secured by notes and deeds
- Closing costs are similar for a HECM & traditional mortgage
Unlike most mortgages
- No monthly mortgage payments are required
- HECM credit line can never be reduced; it is guaranteed to increase over time regardless of loan balance or home value
- Borrower can never be required to repay more than the home is worth (non-recourse loan). Borrower pays modest FHA insurance premium to gain these benefits.
- Borrowers must be 62 in order to apply for a reverse mortgage