Reverse Mortgages are complex but don’t allow myths and skepticism to cloud potential opportunity. Learn the facts about Reverse Mortgages.
1) Myth: "Property Ownership Exchange"
Fact: When a homeowner obtains a government insured HECM Reverse Mortgage on their home, this in turn establishes a mechanism for home equity access that is much easier to qualify for than a traditional forward loan. Many people, including many advisors and realtors, have somehow been led to believe that this is a trade. In other words, an easy qualifying non-recourse loan insured by the government in exchange for the government assuming ownership of the home.
This is completely false. There is no such exchange and the government does not assume ownership of the property. Deeds of trusts are used similar to traditional mortgages and the homeowner(s) remain on title as the sole owner(s) of the property with full ownership rights. To take it one step further, this also means that any appreciation in the property inures to the homeowner. Conversely, if the property were to decline in value the homeowner would then have less equity but there would be no adverse effect on their locked-in benefits at closing for their Reverse Mortgage.
2) Myth: “Reverse mortgages are expensive.”
Fact: This is not necessarily true when you compare what you get with the whole package and considering the benefits of the government insurance. If you live a long life or your property declines in value, the decision to establish a Reverse Mortgage could end up being an exceptionally good move.
Let’s compare what you get with a Reverse Mortgage versus a traditional mortgage. With a Reverse Mortgage any existing home mortgage is paid off. This immediately eliminates the requirement for a monthly mortgage payment. A payment still accrues on your loan internally,thereby decreasing the equity level in your home, but you are no longer obligated to make a payment. A traditional mortgage requires a payment each month. If you are not able to make this payment for any reason you are at risk, not so with a Reverse Mortgage. A Reverse Mortgage has an expensive element over a traditional mortgage called Mortgage Insurance Premium (MIP). Unlike a traditional mortgage, this insures your loan and allows you more flexibility to access equity with a non-recourse loan. The allegation that the MIP makes a Reverse Mortgage expensive on the surface may be true but you have to drill down and examine all the benefits.
A Reverse Mortgage is a very inexpensive means of establishing a mechanism for long term care insurance. When compared to Medicare’s five year look back for eligibility and grab backs from your estate, your options with Medicare are much less flexible and leave nothing for your heirs. Alternatively, a Reverse credit line established today will allow your eligibility to grow annually and will provide immediate funding for care when and if you need it on your terms. This will provide you flexibility and comfort versus Medicare, and allow you to preserve your estate.
In conjunction with this thought, if your property declines in value over time or if you exceed your equity by a wide margin, due to benefit payments as a result of longevity, it is not your problem. The MIP insurance fund makes up the difference and your estate and your heirs are completely unaffected. Most importantly, a Reverse Mortgage gives you the ability to protect your spouse even after you are gone. With a Reverse Mortgage, your surviving spouse is fully protected and can stay in your home with the full benefits of your Reverse Mortgage for as long as they wish. Your surviving spouse must be a borrower on the loan to receive full benefits.
In the long term, when you or your surviving spouse can live comfortably in your home for an indefinite period of time with no monthly required mortgage payment and your estate can remain solvent and in your control, a reverse mortgage no longer looks expensive.
3) Myth: “If the homeowner becomes ill and needs to move to a care facility, the reverse mortgage comes due."
Fact: A reverse mortgage is not due and payable until the last surviving borrower dies, sells the home, or does not live there for 12 consecutive months, as long as property taxes and insurance are paid up and the property is maintained. This means that even if one spouse has a prolonged stay in a hospital or rehabilitation facility, the reverse mortgage will not be affected, and will, in fact, continue to provide much-needed cash flow during this critical time. (This applies when there is more than one borrower on the Reverse Mortgage loan).
4) Myth: “When the homeowner on the reverse mortgage dies, the heirs must pay off the loan, which could exceed the market value of the home. "
Fact: This is a particularly scary myth, as it preys on both the seniors' and heirs' fears. But it is most definitely not true. The reverse mortgage is a non-recourse loan, which means when the property is sold to pay off the loan, there will be no remaining debt for the family to repay — even if the loan balance exceeds the home value. Any shortfall is absorbed by the government insurance fund and does not affect the estate or the heirs. Any remaining home equity belongs to the estate. It is important to remember that with a reverse mortgage, the homeowner owns the house and has sole access to the title, not the lender.
5) Myth: “Social Security and Medicare will be affected by a reverse mortgage.”
Fact: Government entitlement programs such as Social Security and Medicare are not affected by a Reverse Mortgage. However, need-based programs like Medicaid can be affected depending on how much is withdrawn each month. To remain eligible for Medicaid, the homeowner needs to manage how much is withdrawn from the Reverse Mortgage each month to ensure that they do not exceed the Medicaid limits. Ask your Mortgage Professional or Financial Advisor for help determining this limit.
6) Myth: “Reverse mortgages are intended for people who don’t really need the money, and will use it for vacations and such.”
Fact: Seniors from all walks of life and economic status choose reverse mortgages for a variety of reasons but most borrowers today use their loans for immediate needs, such as paying off their existing mortgage or other debts. Many use a reverse mortgage to fund needed home improvements, pay for medical necessities, buy or downsize to a new home without a mortgage payment (called a HECM for Purchase) or as a strategic part of their retirement plan. About a third of senior homeowners who opt for a HECM, do so expressly to be able to afford to “age in place“. Over the last five years, the number of reverse mortgages nationwide has tripled. A Reverse Mortgage is also a very inexpensive means of establishing a mechanism for long term care insurance.
7) Myth: "The homeowner pays taxes on a reverse mortgage."
Fact: The proceeds from a reverse mortgage are not considered income and are therefore, not taxable. Furthermore, the interest on a reverse mortgage can be tax deductible when it is repaid. Consult a tax advisor for more information.
8) Myth: "There are large out-of-pocket expenses with a reverse mortgage."
Fact: The majority of lender closing costs and fees can be financed into the reverse mortgage loan. This means the borrower incurs very little out-of-pocket expense. The required HUD counseling fee and the property appraisal are usually the only out of pocket items.
9) Myth: "The homeowner could get forced out of the home."
Fact: The HECM reverse mortgage was created so that seniors could live in their home for the rest of their lives. Because the homeowner receives payments from a reverse mortgage instead of having to make payments, the homeowner can never be evicted or foreclosed on for non-payment. However, because the senior owns the house and has sole access to the title, the homeowner must continue to pay taxes and insurance and otherwise comply with loan terms to ensure foreclosure does not occur.
10) Myth: "A reverse mortgage is similar to a home equity loan."
Fact: The only similarity between a reverse mortgage and a home equity loan is that they both use the home’s equity as collateral. Below are some of the differences: