A reverse mortgage is one of the most misunderstood financial products available. Even if they qualify for a reverse mortgage and would benefit from the extra stream of funds it would create, many seniors avoid considering one because of myths and misconceptions about reverse mortgages. Let’s take a look at a few of the most pervasive misconceptions and set the record straight.
1. I have to sign my home over to the bank
When you get a reverse mortgage, you do not give up ownership of your home. As the Consumer Financial Protection Bureau points out, you keep the title to your home and are able to continue to live there and do what you want with it. If you end up selling your home after getting a reverse mortgage, you keep what’s left of the sale proceeds after paying back the balance on the reverse mortgage.
2. The bank will get my home when I pass on
After you pass away, your home will go to your heirs, such as your children, not to the bank. Your heirs can decide what to do with the home, which can include paying off the reverse mortgage and keeping the property or selling the home and using part of the proceeds from the sale to pay off the mortgage. As the Federal Trade Commission notes, all reverse mortgages include a non-recourse clause. That means that in the unlikely case that the value of the mortgage exceeds the value of your home, you or your heirs will not have to pay more than the home is currently worth.
3. Reverse mortgages are only for desperate seniors
Getting a reverse mortgage shouldn’t be an act of desperation. In fact, reverse mortgages can be part of a smart retirement plan and can be a way to supplement your income during retirement. Many seniors who take out reverse mortgages use the funds to pay off more expensive credit card debt or to pay off the remaining balance on their existing mortgage. You can also use the payments you receive to improve your quality of life in retirement or to be able to travel. Recent changes to the Federal Housing Administration’s (FHA) reverse mortgage program also mean that you can now use this option to buy a new house.
4. My benefits will be reduced
One common concern seniors have about a reverse mortgage is that the payments they receive from it will have a negative effect on their Social Security or Medicare benefits. The opposite is true: reverse mortgages don’t affect these benefits. The payments you receive from the lender or bank aren’t counted as income. That means they won’t lower your Social Security benefits or affect Medicare. You also don’t have to pay income tax on the payments you receive from a reverse mortgage.
5. Reverse mortgages sound risky
The vast majority of reverse mortgages are part of the FHA’s Home Equity Conversion Mortgage (HECM) program. HECM has a number of requirements and rules that help to reduce the risk involved in getting a reverse mortgage. For example, before you can take out the loan, you need to participate in independent counseling. During counseling, you’ll learn all the details of a reverse mortgage, including what it will cost you and how the programs work. Under the HECM program, only homes in reasonably good condition can qualify for a reverse mortgage. In addition, FHA both tightly regulates and insures HECM reverse mortgages.
Reverse mortgages are only available to people over the age of 62. In the past, that meant that if one spouse and co-owner of the home was under age 62, she or he would have to come off of the deed and would have to pay back the reverse mortgage when the older spouse died. Now, the younger spouse can remain in the home and doesn’t have to pay back the loan if the older spouse passes away first.
Key Points:
- You keep ownership of your home
- Your heirs inherit the home (not the bank)
- Reverse mortgages can be part of a smart retirement plan
- Reverse mortgages don’t affect your benefits
- The risks are minimal, thanks to FHA protections
Ready to learn more about reverse mortgages and find out if one is a good option for you? Schedule an appointment with Rick Schluter, the reverse mortgage specialist at Long Term Living Association, today.
Our Reverse Mortgage Specialist
Rick Schluter
