9 Common Misconceptions About Reverse Mortgages
If you’re a homeowner or homebuyer age 62 or older, reverse mortgage solutions can help you enjoy greater financial flexibility — whether you’re in retirement or still working. But misconceptions about how reverse mortgages work are all too common — and they can prevent you and your loved ones from seeking valuable information on an important financial option.
At Reverse Mortgage Funding LLC (RMF), we know having access to the facts can help you evaluate if a reverse mortgage is right for you. Read on for 9 common myths — and the facts — to help clear up the confusion about today’s reverse mortgage loans.
Myth #1: The bank will own my home.
Fact: This is one of the most common misconceptions we hear about reverse mortgages. Just like any mortgage or home equity loan, you continue to own your home, with your name on the title. Of course, you must meet your loan obligations: keeping current with property taxes, homeowners insurance, maintenance and any homeowners association (HOA) fees.
Myth #2: Reverse mortgages are designed to take advantage of retirees.
Fact: Reverse mortgages are specifically designed to help retirees. Many people are living longer — and they’re rightfully concerned about outliving their retirement savings. The ability to leverage home equity can provide a sense of security and financial support. The industry is also highly regulated. Any lender offering reverse mortgages must follow strict state and federal guidelines and regulations that are in place to protect borrowers. In addition, lenders and originators who are members of the National Reverse Mortgage Lenders Association pledge to uphold the industry’s highest ethical standards.
Myth #3: There are too many reverse mortgage fees.
Fact: Just like any other mortgage product, there are fees associated with a reverse mortgage loan. Most of the up-front costs are similar to those with a traditional mortgage — such as an origination fee and closing costs. What’s different? With FHA-insured* reverse mortgages (called Home Equity Conversion Mortgages), there is also an up-front Mortgage Insurance Premium, which is paid to a government mortgage insurance fund.* This insurance premium ensures that you will never owe more than your home is worth if the balance of the loan exceeds your home’s value when the loan is due and payable. There’s also a fee for reverse mortgage counseling by an independent, third-party counselor, to make sure you understand all aspects of the loan. However, except for the counseling fee, all the up-front costs can be financed by the loan, which minimizes out-of-pocket expense. During the life of the loan, interest and an annual mortgage insurance premium (MIP) accrue on the outstanding loan balance, which is due when the loan is repaid. Some lenders also charge a monthly service fee, so be sure to inquire about any ongoing charges.
Myth #4: When the loan value exceeds the value of my home, I’m responsible for the difference.
Fact: A federally-insured* reverse mortgage — known as a Home Equity Conversion Mortgage (HECM) — is a non-recourse loan. That means that a borrower, as well as his or her estate, will never owe the lender more than the home’s current value when the loan is repaid.
Myth #5: I won’t qualify because I already have a mortgage.
Fact: You might — it depends on how much equity you have in your home. If you have sufficient equity to qualify, proceeds from your reverse mortgage would first be used to pay off any existing mortgage(s). In other words, the balance of your existing loan will be refinanced by your reverse mortgage. More on eligibility requirements here.
Myth #6: My family will lose their inheritance.
Fact: Your heirs will still inherit your home, but they will have to pay back the loan balance if they want to keep it; this includes the amount of funds you used plus accrued interest and fees. They can also sell the home to repay the loan. Once it’s repaid, they retain any remaining equity. We encourage our customers to involve their family and trusted advisors in the decision-making process.
Myth #7: My spouse won’t be provided for after I pass away.
Fact: Your co-borrowing spouse is entitled to remain in the home as their primary residence, enjoying all the benefits of the reverse mortgage, as long as they continue to meet the loan obligations (keeping current with property taxes, insurance, maintenance and any homeowners association fees). A qualified non-borrowing spouse who meets certain conditions can continue living in the home; however, they will not have access to any additional reverse mortgage funds since they are not a borrower.
Myth #8: A reverse mortgage will interfere with my Social Security.
Fact: The funds from a reverse mortgage generally do not affect regular Social Security or Medicare benefits. However, needs-based benefits, such as Supplemental Security Income or Medicaid, may be affected. Consult with a financial professional about your individual situation; visit www.ssa.gov.
Myth #9: Reverse mortgages are a last resort.
Fact: Many savvy homeowners use a reverse mortgage strategically — for example, as a safety net in case of emergencies. Think of it this way: There are different types of loans for different situations and stages of life — student loans, first-time homebuyer loans — and this is a loan designed specifically for people age 62 and older, to give them more financial flexibility. In the past, many reverse mortgage borrowers were “house rich and cash poor.” But in recent years, a lot has changed. There have been a number of product advances that have made reverse mortgages more attractive, and academic researchers at respected universities have developed effective strategies for using a reverse mortgage as part of an overall retirement plan. Today, financial advisors are increasingly viewing them as an important option to be considered.
Still have questions about reverse mortgages?
When you have the facts, you can make better decisions about your retirement finances — and RMF can help. To find out more about reverse mortgages, call 888-277-1567 for a convenient phone appointment with a licensed reverse mortgage specialist.
*This material has not been reviewed, approved or issued by HUD, FHA or any government agency. The company is not affiliated with or acting on behalf of or at the direction of HUD/FHA or any other government agency.