Wednesday, May 05, 2021

The myths and truths of reverse mortgages

by Kirsten Madden, Century 21 Broker/Owner
| February 11, 2021 1:00 AM

If you have ever heard of a reverse mortgage, you may not have heard the whole story.

A reverse mortgage is a useful tool for homeowners who have a lot of equity in their home and may want access to cash but do not want or need to sell or move. It is an FHA Insured loan that not a lot of people are familiar with, and in the process, some misinformation has been created.

As a service to readers, we would like to help you sort facts from fiction about reverse mortgages and share why some people may want to consider one.

A quick definition: a reverse mortgage is an FHA insured loan available to homeowners age 62 or over who have acquired considerable equity in their primary residence. A reverse mortgage provides the opportunity to borrow against the current value of the home and receive the equity in non-taxable funds. They are typically given the choice of a lump sum, a fixed monthly payment, or a line of credit.

No monthly payments are needed. But when they pass away, move, or sell the home, the entire balance becomes due to them or their heirs. The loan is a non-recourse loan which means that the payoff can never exceed the value of the home, there will never be any additional recourse to the owner or heirs.

While a reverse mortgage has the potential to be helpful, common myths include:

  1. They take advantage of seniors. The opposite is true. This arrangement offers the opportunity for someone of retirement age to have easy access to non-taxable funds, which could be a nice supplement to retirement income. This financial flexibility can make it easy to stay in your home for as long as you are able, instead of having to relocate to an assisted living community. Since there are no restrictions on how funds are used, people can use them for everything from in-home care to home upkeep or even travel.
  2. The bank now owns the home. This is also false: the property owner keeps the title, and still pays things like property tax, insurance, and maintenance. The bank provides the money from any equity saved up.
  3. My heirs will lose their inheritance. If you pass away, your children or heirs will be given the option to repay the loan and keep the home. Or they can agree to sell the home, pay off the reverse mortgage and even keep any remaining equity, especially if the home increases in value over the years.
  4. You will lose any pension, Medicare, or Social Security benefits. These may not be affected by a reverse mortgage, talking with a financial advisor can provide more details.
  5. I am already paying a mortgage. Even if you are still paying on a mortgage, you may be able to tap into the equity of your home to add to your cash flow plus pay off your current mortgage, which will relieve a good deal of financial burden.
  6. A reverse mortgage prevents me from selling. If you want to relocate or downsize at some point in the future, you can sell and use some of your profit or sale funds to pay off any remaining balance from the reverse mortgage. You will be able to keep any remaining equity. You can even use your equity as a down payment and purchase a new home using another reverse mortgage.
  7. I am too old to do this. The rules are clear that applicants must be age 62 or older. A reverse mortgage can only be used on a primary residence meeting FHA guidelines.
  8. This will cause family fights. Some drama may be inevitable when estates and inheritances are discussed but planning ahead and receiving a reverse mortgage can provide you with financial freedom. At the same time, your family should also be aware of this arrangement, so they do not have to worry about you or your home.
  9. There are too many strings. Homeowners can use the money any way they choose to. It can provide some degree of financial stability which could be welcome especially as someone moves into a different phase of their life and does not have employment income.
  10. I cannot afford to buy a home. If you do not think you can afford a new home, a reverse mortgage could be a tremendous help. You can receive access to another tool called a Home Equity Conversion Mortgage, which lets you combine your cash down payment with loan proceeds, providing you much more purchasing power. You are not required to make monthly payments on the loan, and you can stay in the home for the rest of your life.

As you can tell, there is much more to the story than the common myths. A reverse mortgage can be an extremely useful tool to ease financial burdens and allow seniors to stay in their homes. Consult your financial advisor for more information.