You’ve heard this before:
- It’s a scam.
- The bank takes your house.
- Don’t do it unless you’re desperate.
However, here is the real truth about Reverse Mortgages. Home Equity Conversion Mortgages (HECM) were developed to provide some financial options for seniors over 62 in retirement, and their spouses. Over the years, more and more protections have been put in place that makes today’s reverse mortgages safer.
HECM Loans allow homeowners 62 and older to access the equity in their homes to improve cash flow and increase the longevity of their assets. To help you understand the common misconceptions regarding Reverse Mortgages, we have compiled a list to help you understand the program and the benefits for those looking to enjoy a stress-free retirement.
8 Common Myths:
MYTH: A Reverse Mortgage sells the home to the bank
TRUTH: The homeowner keeps the title to the home in their name. The Lender places a lien on the title which guarantees that the mortgage will eventually get paid in full.
MYTH: Heirs will not inherit the home
TRUTH: The estate inherits the home as usual, but there will be a lien on the title. The lien is whatever proceeds were received from the reverse mortgage plus accrued interest.
In order to retain the home, the heirs must either repay the reverse mortgage or 95% of the appraised market value of the home. No assets other than the home must be used to repay the debt
MYTH: The homeowner could get forced out of the home
TRUTH: The HECM reverse mortgage was created specifically to allow seniors to live in their homes for the rest of their lives. Because the homeowner typically receives payments from a reverse mortgage instead of making payments to a lender, the homeowner can never be evicted or foreclosed on for non-payment. The homeowner must live in the home as their primary residence, pay property taxes, homeowner’s insurance, HOA Association dues (if applicable) and maintain the home according to FHA requirements, otherwise, the loan becomes due and payable.
MYTH: Someone can outlive a reverse mortgage
TRUTH: The reverse mortgage becomes due when all homeowners have moved out of the property for 12 consecutive months or passed away. The homeowner must live in the home as their primary residence, pay property taxes, homeowner’s insurance, HOA Association dues (if applicable) and maintain the home according to FHA requirements, otherwise, the loan becomes due and payable.
MYTH: Social Security and Medicare will be affected
TRUTH: Government entitlement programs* such as Social Security and Medicare are not affected by a reverse mortgage. However, need-based programs such as Medicaid can be affected. To remain eligible for Medicaid, the homeowner must manage how much comes from the reverse mortgage in one month to ensure Medicaid limits are not exceeded.
* Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
MYTH: The homeowner pays taxes on a reverse mortgage
TRUTH: The proceeds* from a reverse mortgage are not considered income and are not taxable. Furthermore, the interest on a reverse mortgage can be tax-deductible when it is repaid.
MYTH: There are large out-of-pocket expenses
TRUTH: Typically the only out-of-pocket expense is the cost of the counseling and the appraisal.
MYTH: A reverse mortgage is similar to a home equity loan
TRUTH: The qualifications for a home equity line are vastly different from a reverse mortgage, a home equity loan requires stable income and a solid credit score. A reverse mortgage has minimal credit, income, and asset qualifiers.
A home equity loan must be repaid in monthly payments over 5 or 10 years. A reverse mortgage is typically not paid back until the homeowner moves out of the property for 12 consecutive months or passes away.
The Bottom Line: A Reverse Mortgage Can Be A Great Option For Some
If you’re considering a reverse mortgage, it’s important to understand the facts. Contact us and we can walk you through the options to see if a HECM or Reverse Mortgage is right for you.