A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration insured loan (FHA). A reverse mortgage enables seniors 62 or older to access a portion of their home’s equity to obtain tax free1 funds without having to make monthly mortgage payments.2 Reverse mortgages are complex products, and there are several prevalent myths out there about how they work. However, the more you know, the better you’ll be able to decide if a HECM loan is right for you. Below are five common myths about reverse mortgages and the truth about these misconceptions:
Myth:
The lender owns your home.
Reality:
Borrowers retain the title and maintain ownership of their home for the life of the loan. As a result, the borrower can sell the home at any time. The loan does not become due as long as you continue to meet all of the obligations of the loan. For example, borrowers must continue living in the home as their primary residence, maintain the home according to FHA requirements and continue to pay property taxes and homeowners insurance.
Myth:
You pay taxes on the loan proceeds.
Reality:
The loan proceeds are tax-free as they are not considered income. However, it’s always best to consult with a trusted financial advisor and appropriate government agencies for any effect on taxes and government benefits.
Myth:
If the balance of the loan grows larger than the home value, then the borrower is required to pay the difference.
Reality:
HECMs are non-recourse loans. This means that if the home is sold to repay the loan, the borrower or their heirs will never owe more than the loan balance or the value of the property, whichever is less. In addition, no assets other than the home can be used to repay the debt.
Myth:
In order to qualify, you must own your home free and clear of any existing mortgages.
Reality:
While you do need to have enough equity in your home, many borrowers use their reverse mortgage loan proceeds to pay off any existing mortgage and eliminate monthly payments.2
Myth:
A reverse mortgage should only be used as a loan of last resort.
Reality:
Reverse mortgages have historically been viewed as being best suited for ‘needs based’ borrowers. However, this perception is starting to change. Seniors are now using HECM loans as part of a comprehensive financial planning strategy. For example, borrowers may use a reverse mortgage line of credit to defer collecting social security or as a safety net to draw on in case of emergencies.
If you’d like to learn more about reverse mortgages, please use our Reverse Mortgage Calculator or call 800-218-1415.
1 Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
2 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.
Author: Meredith Manz