You may have seen Reverse Mortgages, also called Home Equity Conversion Mortgages (HECM), in the news lately. These types of mortgage loans have become a topic of discussion for many seniors as they plan for retirement. With new safeguards in place, these Federal Housing Administration1 (FHA) insured loans are now recommended by many financial advisors as a smart tool to use in your retirement portfolio.2 Despite the positive press that reverse mortgages have received, there are still many misconceptions surrounding them. The list below debunks seven common reverse mortgage misconceptions.3
1. Reverse mortgages are a Scam
A reverse mortgage is a viable financial tool that is highly regulated by the FHA. Recent product changes have made these loans safer than ever. With an FHA reverse mortgage you will never owe more than the value of your home, and your home is the only asset that can be used as collateral for the loan. To qualify for this type of loan the youngest borrower on title must be at least 62 years of age, the home must be the borrower’s primary residence, and the home must have sufficient equity. Additionally, the borrower must undergo a counseling assessment with an agency approved by the Department of Housing and Urban Development (HUD), and undergo a financial assessment to ensure the borrower is capable of covering the costs of home maintenance, property taxes, and homeowners insurance.
2. A reverse mortgages is a loan of last resort
This misconception stems from the misguided thought that reverse mortgages are only for people who are struggling financially. In reality, reverse mortgages are a multipurpose tool that can be leveraged by many different types of borrowers. Whether you are looking to diversify your retirement investment portfolio, supplement retirement income, or move into a new home, a reverse mortgage is a valuable tool that may help you reach your goals.
3. If one spouse dies, the other can lose the home
Reverse Mortgages have safeguards in place to help the surviving spouse of a reverse mortgage borrower stay in the home. As long as the non-borrowing spouse meets the loan conditions, they may remain in the home after the borrower is gone without the loan becoming due.
4. Reverse mortgage loans are expensive
As with any other loan, reverse mortgages also have closing fees and interest charges that vary depending on different factors. However, for many individuals reverse mortgages have become more accessible as a result of recent product changes. The best way to find out the interest and fees that you would be charged is to talk to a licensed loan advisor who can speak with you about your individual situation. They will happily provide you the information you need at no obligation to help you make an informed decision.
5. Your home must be paid off to qualify for a reverse mortgage
Your home does in fact need to be paid off before receiving the funds from your reverse mortgage. But, you can pay off your home at closing using the payment from the reverse mortgage.4 You must have enough equity in your home to cover the balance on your existing mortgage and eliminate your monthly mortgage payment.5 Any remaining loan proceeds may be used however you choose.
6. My heirs must pay back the loan
If your estate or heirs want to keep the home, they will need to pay off the loan. They can choose to refinance or pay off the loan through other means. In the event that the loan amount exceeds the value of the home, your estate or heirs will only be responsible for paying off the loan up to 95% of the home value. If your heirs don’t want the house, they have a couple options.
1) They can sell the home and receive any remaining sales proceeds after paying off the loan.
2) If there is no potential equity, your estate or heirs may decide to simply hand the keys to the lender and avoid the hassle of trying to sell the home. They will need to sign the deed over to the lender; this process is known as “Deed in lieu of foreclosure.”
7. The bank owns my home
The bank does not assume ownership of your home when you take out a reverse mortgage. You still own your home and the lender secures the loan through a lien. You can then borrow against the value of your home’s equity while staying in your home and maintaining the title.6
An FHA insured reverse mortgage has many safeguards in place to help prevent seniors from losing their homes. If you are looking for ways to live a more comfortable retirement, a reverse mortgage may be an option for converting your home equity into the funds you need. To learn more or request a free eligibility assessment contact a licensed loan advisor at 1 (800)976-6211 or click here to request a call back.
1 Federal Housing Administration (FHA) mortgage insurance premiums (MIP) will accrue on your loan balance. You will be charged an initial MIP at closing. The initial MIP will be 2% of the home value but not to exceed $12,723. Over the life of the loan, you will be charged an annual MIP that equals .5% of the outstanding mortgage balance.
2 Investment News. Changes in Reverse Mortgages Give Advisors New Tools in Retirement Planning. http://www.investmentnews.com/article/20160612/FREE/160619991/changes-in-reverse-mortgages-give-advisers-new-tools-in-retirement
3 The Seattle Times. Debunking 7 Common Misconceptions About Reverse Mortgages. https://www.seattletimes.com/business/debunking-common-misconceptions-on-reverse-mortgages/
4 Your current mortgage(s) and any other existing liens against the property, must be paid off at or before closing.
5 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance, and maintain the home according to FHA requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.
6 You will retain the title and ownership during the life of the loan, and you can sell your home at any time (at which time the loan becomes due). The loan will not become due and subject to repayment as long as you continue to meet loan obligations such as living in the home as your primary residence, maintaining the home according to the Federal Housing Administration (FHA) requirements, and paying property taxes and homeowners insurance. Failing to meet these requirements can trigger a loan default that may result in foreclosure.