Most seniors are familiar with the TV ads over the last few years about reverse mortgages. Even today, there are myths that fog up the facts that reverse mortgage loans provide to seniors. Below are some of the common misconceptions about reverse mortgage loans.
Common Reverse Mortgage Misconceptions:
1 – The second you get a Reverse Mortgage; the bank owns your home.
Answer: The bank won’t own your home by signing loan papers.
You will maintain the title to your home for as long as you live in it and comply with all loan terms.
2 – Reverse Mortgages are very risky.
Answer: Reverse Mortgages are widely regarded as a safe financial product. The federal government has placed strict regulations and safeguards on Reverse Mortgages to protect seniors. Additionally, the National Reverse Mortgage Lenders Association (NRMLA) was created to develop and promote best practices in the Reverse Mortgage industry.
3 – Your home must be paid off to qualify for a Reverse Mortgage.
Answer: As long as there is sufficient equity in your home, you may be eligible for a Reverse Mortgage, even if you still owe money on your existing mortgage. However, the existing mortgage balance must be paid off at closing. But you can use the funds from your Reverse Mortgage, or another source to pay off that balance.
4 – You could end up owing more than your home is worth.
Answer: Reverse Mortgages are structured with safeguards so that you or your estate can never owe more than the appraised value of the home. As well, the Federal Housing Administration, an arm of the U.S. Department of Housing and Urban Development (HUD), insures HECM products.
5 – Reverse Mortgages are taxable and will affect your Social Security and Medicare.
Answer: Reverse Mortgage proceeds are not taxable because the IRS does not consider them as income, but rather, a loan. In addition, a Reverse Mortgage will generally not affect regular Social Security payments or Medicare benefits. However, certain need-based government aid programs, such as Supplemental Security Income (SSI) and Medicaid, may be affected. We recommend you consult with your Medicare, Social Security or Medicaid program administrator to determine the specific rules.
6 – The bank takes your home when your Reverse Mortgage becomes due.
Answer: You are in control of your home and will maintain the title, not the bank or lender. A Reverse Mortgage functions like any other mortgage with a lien placed on the property. The right to remain/keep the home is contingent on the borrower complying with all loan terms. If you move out of the home, the loan becomes due and must be paid. Generally, you can pay off the loan balance two ways: You or your heirs can sell the home and use the proceeds or use other sources of funding.
7 – The bank can foreclose.
Answer: Lenders can only foreclose on a reverse mortgage loan for certain reasons.
Foreclosure may occur if the home-owner does any of the following:
(1) lives somewhere other than the home longer than allowed by the loan agreement (12 consecutive months or longer). You must live in your home as a primary residence. If you go on vacation or a nursing home or on missionary service, you cannot be gone longer than the allowed time each year.
(2) the home-owner does not pay property taxes or home-owner insurance premiums due each year.
(3) Failure to maintain the home can result in foreclosure. The home must be maintained in reasonable living condition.
8 – There are restrictions on how you can use the money.
Answer: You can use your Reverse Mortgage funds for however you see fit.
9 – Your family hopes to someday inherit your home or they don’t feel comfortable with a Reverse Mortgage.
Answer: We encourage you to talk to your family and heirs and ask them to research Reverse Mortgages with you. Many baby boomers are faced with planning for their own retirement and paying for their children’s education so they are happy that their parents have a financial solution available to help them live more independently and financially secure.
10 – My Heirs will have to pay the full amount that is owed when the borrowes die
Answer: Reverse mortgage loans are “Non-recourse Loans”. This means you can never owe more than the value of your home at the time you or your heirs sell your home to repay your reverse mortgage.
If your reverse mortgage loan is a “HECM” loan, (Home Equity Conversion Mortgage), one option to satisfy the loan (debt) is by paying the lesser of the mortgage balance or 95% of the appraised value of the home at the time the property is sold.