Reverse Mortgages: Myths and Realties

reverse-mortgage-truthAs with many financial products, reverse mortgage loans can be complicated to understand at first, so there may be a number of misconceptions about how the product works. Below are a few of the common myths and realities.

Does the borrower own the home?

Yes. The borrower will retain the title and ownership during the life of the loan. The loan will not become due as long as the borrower continues to meet loan obligations such as living in the home as their primary residence, maintaining the home according to the FHA requirements, and paying property taxes and homeowners insurance.

Does the home need to be clear of any existing mortgages?

No. Actually, many borrowers use the reverse mortgage loan proceeds to pay off an existing mortgage and eliminate monthly mortgage payments.1

Does the borrower have to repay the loan?

Yes, eventually. However, repayment is not due during the life of the loan provided the borrower meets the loan obligations such as living in the home as their primary residence, maintaining the home according to FHA requirements, and continuing to pay required property taxes and insurance.  The reverse mortgage loan typically becomes due when the borrower passes away or sells or moves out of the home.  The Home Equity Conversion Mortgage (HECM) reverse mortgage is a “non-recourse” loan. 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; and no assets other than the home must be used to repay the debt.

Does the borrower have to make monthly mortgage payments?

No. Unlike a traditional home mortgage loan or equity loan, you do not make monthly mortgage payments, and any existing mortgage will be paid off using the loan proceeds. However, if the borrower does want to make payments, there are no prepayment penalties.

Is the use of my loan proceeds restricted?

No. The net cash proceeds from the reverse mortgage loan can be used for any reason. Many borrowers use it to supplement their retirement income, pay off debt or remodel their home.

Does the borrower have to pay income taxes on the proceeds?

No. Reverse mortgage loan proceeds are tax-free as it is not considered income. However, it is recommended that you consult the appropriate government agencies for any effect on taxes or government benefits.

To learn more about reverse mortgage loan eligibility, protections, and strategies contact a Reverse Mortgage Advisor at 800-976-6211, today!