Despite saving less money for retirement, many older adults are still hesitant about tapping into their home equity with a reverse mortgage due to misconceptions about how a reverse mortgage works. A reverse mortgage is a Federal Housing Administration (FHA) insured loan1 that allows homeowners, age 62 and older, to access a portion of their home equity while eliminating their monthly mortgage payments.2
To better understand a reverse mortgage loan, below are the truths to the most common misconceptions.
Reverse mortgages are a scam
Safeguards are in place to ensure that older adult homeowners understand the reverse mortgage process and make an informed decision if it is right for them.
- All applicants must take a financial assessment. The Department of Housing and Urban Development (HUD) requires a financial assessment that evaluates the borrowers’ willingness and capacity to meet their financial obligations and mortgage requirements.3
- Borrowers are also required to complete counseling by an independent Home Equity Conversion Mortgage (HECM) counselor as part of the application process.4
- In some cases, and as required by FHA, a portion of the loan proceeds may be placed into a Life Expectancy Set Aside (LESA), to assist and ensure the borrower can pay required property taxes and homeowners insurance.
You don’t own your home
A reverse mortgage allows older adults to live in their homes for as long as they wish and keep the title of their home.
- Your lender or the government does not own your home.
- You will not be evicted or foreclosed on as long as you meet the obligations of the loan.
- Your home is your primary residence, and you continue to pay required property taxes, and homeowners insurance, and maintain the home according to FHA.5
Failure to meet these requirements can trigger a loan default that may result in foreclosure.
You can’t have a current mortgage on the home to qualify for a reverse mortgage
Many borrowers get a reverse mortgage to eliminate their monthly mortgage payments.2 You can have a current mortgage or other debt on your home’s title if you have enough equity in the property to qualify for a reverse mortgage. The mortgage or debt must be paid off with the proceeds of the reverse mortgage, which eliminates the mortgage payment.2
You will lose your Social Security and Medicare
Usually, government entitlement programs such as Social Security and Medicare are not affected by a reverse mortgage. However, it is recommended to consult with a qualified financial advisor or government agent to learn how a reverse mortgage could impact the eligibility of some government benefits.
Your spouse will need to move out of the home when you pass away
There are protections for the eligible non-borrowing spouse if they did not qualify because of their age and are not on the loan. Upon the passing of the last remaining borrower, an eligible non-borrowing spouse may have repayment of the reverse mortgage deferred if certain requirements are met.4
The bank will sell your home when the loan comes due
You can stay in the home as long you continue to meet the obligations of the loan. Should you decide to sell the home or move out, the loan becomes due and payable because your home is no longer your primary residence.
I can be evicted if I outlive my life expectancy
You cannot be evicted or foreclosed on if you outlive your expectancy, as long as you continue to meet the loan obligations.
Your heirs won’t inherit the home
You can leave your home to your children, or to anyone that you choose. When the loan becomes due, your heirs have the option of paying off the balance of the loan and keeping the home.
Call 1-800-976-6211 to speak with a licensed loan advisor and they can answer any questions and help determine if a reverse mortgage is right for you.
1 As required by the Federal Housing Administration (FHA), you will be charged an initial mortgage insurance premium (MIP) at closing and, over the life of the loan, you will be charged an annual MIP based on the loan balance.
2 Your current mortgage(s) and any other existing liens against the property must be paid off at or before closing. 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.
3 Mandatory obligations are those fees and charges, as defined by the U.S. Department of Housing and Urban Development (HUD), incurred with the origination of the HECM loan that are paid at closing or during the first 12-month disbursement period. This includes but is not limited to: existing liens on the property; the loan origination fee; counseling fee; upfront MIP; third-party closing costs; customary fees and charges for warranties, inspections, surveys, engineer certifications; repair set-asides; set-aside for property taxes and insurance; and delinquent federal debt.
4 The U.S. Department of Housing and Urban Development (HUD) provides a list of approved reverse mortgage counseling agencies for you to choose from. The purpose of this requirement is so you are aware of all of your options and can evenly weigh the pros and cons of each.
5 As required by the Federal Housing Administration (FHA), you will be charged an initial mortgage insurance premium (MIP) at closing and, over the life of the loan, you will be charged an annual MIP based on the loan balance.
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