A reverse mortgage is a financial product that allows you to gain access to your home equity. Essentially, it is a loan that you take out against the value of your home, which pays you through a lump sum, term payments, or a line of credit, depending on which type of reverse mortgage payment plan you choose.
The concept of a reverse mortgage is easy to understand. However, the term “reverse mortgage” can lead to confusion and false assumptions about the details of the product. There are many myths and misconceptions about reverse mortgages that–unfortunately–a lot of people still believe today. For this reason, we’ve come up with a helpful article to help you differentiate between myth and fact when it comes to reverse mortgages.
Myth #1: The lender or government will own your home
It is important to know that you remain the owner of your home with a reverse mortgage. When you take out a reverse mortgage, the lender is simply adding a lien on the title to ensure that it will regain the money it lends. You, as the homeowner, get to keep the title of the home in your name.
Myth #2: You will have to make monthly payments
As long as you meet the loan obligations (e.g., paying homeowner’s insurance and property taxes, as well as keeping the home in good shape), a reverse mortgage will not require you to make monthly mortgage payments. Depending on what type of reverse mortgage loan you take out, you can make monthly mortgage payments to reduce your loan balance–but it is not mandatory.
Myth #3: Your heirs will not be able to inherit your home
Non-inheritance is a major concern for many homeowners considering a reverse mortgage. A reverse mortgage is a non-recourse loan, meaning that the borrower or their estate will never owe more than the value of the home or the loan balance, whichever is lower. If the balance remains unpaid when it is due, a foreclosure often follows, and the borrower or their estate will not be liable for anything owed as a result of the foreclosure.
Typically, borrowers or their heirs sell the home and use the proceeds to pay off the loan balance. However, your heirs will have the option to buy the home if they want to keep it.
Myth #4: You won’t be able to sell your home
You can sell your home and pay off the reverse mortgage with the proceeds. You will not incur any prepayment penalties for paying off the loan or selling the home before the balance is due. If the proceeds of the sale are higher than the loan balance, you get to keep the difference.
Myth #5: You have to pay taxes on your reverse mortgage proceeds
The Internal Revenue Service (IRS) does not consider reverse mortgage proceeds as income. Therefore, your payments are non-taxable. However, you will still have to pay property taxes as part of the loan agreement.
Myth #6: Your spouse has to leave the house when you die
While it is ideal that your spouse is listed as a co-borrower on your HECM loan, this cannot always be the case. For instance, your spouse may not be 62 years old when you decide to take out the loan or you have a prenuptial agreement in place. Whatever the case may be, you can list your spouse as a non-borrowing spouse on the loan contract. This way, they can stay in the home after you pass away as long as they abide by the loan obligations.
However, there are certain requirements that a non-borrowing spouse must meet so that the house won’t be foreclosed after the borrowing spouse’s passing, which are:
- They must be married to the borrower at loan closing and remain married for the duration of the marriage
- They must occupy the home as their primary residence
- They are listed as a non-borrowing spouse on the loan contract
- They will comply with the HUD requirements
- They can prove that they have the legal right to stay in the house within 90 days of the borrower’s death
- They can certify that they are the late borrower’s non-borrowing spouse occupying the property (done every year)
Myth #7: You can’t qualify if your home isn’t paid off
As long as you have built considerable equity in your home, you can still qualify for a reverse mortgage loan. Even if you are still paying off the mortgage or other debt on the home’s title, you may still be eligible for this type of loan. As a matter of fact, many homeowners get a reverse mortgage to pay off a traditional mortgage and eliminate their monthly mortgage payments.
Myth #8: Only desperate people get reverse mortgages
A reverse mortgage is not the last resort. In fact, it can be an extremely helpful way to raise your retirement income, increase your cash flow, pay off other debt, and live the lifestyle you want after retirement–or all of the above.
Homeowners who borrow against the value of their home can even grow a line of credit exponentially–so long as they leave it untouched for a considerable amount of time. For people who take out reverse mortgages with lines of credit as the payment method, it can be an effective way to raise their future income, especially when they take out the loan earlier rather than later.
Myth #9: You will have nothing to leave to your children
If your home is your only asset, not having anything to leave to your kids can be a great concern. However, taking out a reverse mortgage does not necessarily mean that you won’t have anything to leave to your estate. Over time, your home value can increase. The difference between your home’s value and the loan balance may serve as an inheritance for your children and your surviving spouse.
Myth #10: You can outlive a reverse mortgage
The loan balance becomes due when you pass away or move out of the property for twelve months. As long as you are alive, occupy the home as your primary residence, and comply with the loan obligations, the loan lives on. The same is true for any surviving borrower.
However, what you can outlive are the proceeds. If, say, you take out your loan payment as a lump sum, there is a risk of running out of money before you pass away. On the other hand, if you choose to go with term payments (a payment arrangement that pays you in equal amounts for a certain number of months), you won’t receive any more proceeds when the time is up–but you can still occupy your home as long as you continue meeting the loan obligations.
For this reason, it is extremely important to consider what type of payment plan to choose. Choosing a lump sum payment is, by far, the riskiest. The least risky is a tenure reverse mortgage, which provides equal monthly payments for a lifetime as long as there is one borrower living in the home and loan obligations are met.
Myth #11: There is a high risk of foreclosure on these loans
All borrowers must undergo a financial assessment to ensure that they are financially capable of meeting loan obligations, which are paying for maintenance, homeowner’s insurance, and property taxes. If you are not financially capable to do so, part of the loan proceeds can be set aside to pay for these obligations, which significantly reduces the risk of foreclosure.
Moreover, most lenders are willing to work with borrowers to avoid foreclosure defaulting on a reverse mortgage and, ultimately, a foreclosure. If you ever find yourself having difficulty paying taxes, insurance, and/or maintenance, you can speak with your lender about new payment arrangements.
Myth #12: Reverse mortgages and home equity loans are exactly the same
While reverse mortgages and home equity loans both allow you to use your home as collateral, there are stark differences that you must be aware of:
- You must be at least 62 years old to qualify for a reverse mortgage
- A reverse mortgage loan is typically not due until the borrower passes away or moves out of the house for 12 consecutive months. With a home equity loan, the balance must be repaid in monthly payments over a certain number of years.
- You can choose a lump sum payment, line of credit, or equal monthly payments for a reverse mortgage–or a combination of the three. A home equity loan gives you a lump sum payment.
- There are no income requirements for a reverse mortgage loan, unlike a home equity loan.
Myth #13: You can lose Medicare and Social Security benefits
This is simply not true. A reverse mortgage will not affect Medicare or Social Security benefits. However, it can affect Medicaid and other needs-based programs. In which case, you have to ensure that your income does not exceed the program limits by managing your monthly withdrawals.
With careful planning, a reverse mortgage can be a highly beneficial product for many retirees. Nevertheless, there are a lot of factors that you need to consider; risks that you have to weigh; and myths that you have to dispel before thinking about approaching a lender.
If you have more questions about reverse mortgages, our specialists are always glad to help. Call us at (844) 230-6679.