Most homeowners are in that age group of their lives when they look forward to retirement income, and there is one alternative option that is rather tempting-and it is what is termed as a reverse mortgage. If a reverse mortgage is availed of, then seniors can convert home equity into ready cash, with no need to sell or leave the property. However, with the probable gains, myths cloud the realities and make any person skeptical about this financial tool. A look into some of the most common myths surrounding reverse mortgages and their facts will render you a well-informed decision.
What is a Reverse Mortgage?
Reverse Mortgage is a special type of credit working exclusively with house owners aged 62 and above. It enables them to convert a portion of their equity into a loan. Unlike the traditional mortgage whereby the borrower pays the lender every month, the reverse mortgage is just the opposite whereby it is the lender that pays the house owner. This generally is repayable upon the sale of the home, relocation or death of the homeowner. The longer the time, the more one has to repay because the interest on the loan grows with time. Type of Reverse Mortgages There are three types of reverse mortgages:
- Home Equity Conversion Mortgage: This is the most common form of reverse mortgage and is government-insured
- Proprietary Reverse Mortgages: These are loans issued by private lenders.
- Single-Purpose Reverse Mortgages: These are usually offered through state and local government agencies and are generally tailored to satisfy a specific need, such as home repairs or property taxes.
Common Myths About Reverse Mortgages
- Myth: The Bank Will Own My Home
The other common myth about reverse mortgages is something to the effect that with a reverse mortgage drawn on their home, the bank then owns the homeowner’s home. Actually, they retain full ownership of their home as long as the home owners continue to keep the home up and pay property taxes and carry insurance on the property. The reverse mortgage holds a lien on the home; however, control of the property and rights to live in it remain with the homeowner.
- Myth: You Will Owe More Than Your Home is Worth
The second most common myth existing about a reverse mortgage is that you will owe more than your home is worth. This fear is fed many times by knowing the balance of the loan increases over time as interest and fees continue to pile up. So with an HECM-but you know, the one that is insured by the federal government-you’ll never owe more than what your house is appraised for when you pay it back, even if your outstanding balance goes over that amount. There is a “nonrecourse” clause, which means that, at that time, if the loan balance is higher than that of the value of the home, you or your heirs will not be responsible for the difference.
- Myth: Reverse Mortgages Are Only for Those Desperate for Cash
The general impression would be that one resorts to a reverse mortgage as a matter of last resort because one is desperate for cash due to general inability to fund retirement. As a matter of fact, the reverse mortgage may prove effective for spending retirement years in one’s house, using home equity for necessary living expenses, health costs, or whatever other retirement needs. It can be part of major retirement planning that will enable the people to maintain financial independence and live in houses in which they fought to own.
- Myth: Reverse Mortgages are too expensive
Although it may be true that reverse mortgages do, in fact, include costs and interest upon taking one out, many of these seniors are going to be quite surprised at just how much more reasonable the reverse mortgage actually is than they could have ever imagined. The general costs involved with a reverse mortgage, also added to the balance of the loan, are origination fees, premiums paid on mortgage insurance, and closing costs. Like most other varieties of mortgages, most of these can be added onto the loan instead of having to pay the owner upfront-so the homeowner does not have to come up with the cash from one’s pocket. Some, like HECMs, even boast of flexible payment options with much lesser interest rates.
- Myth: Reverse Mortgages Will Affect My Social Security and Medicare Benefits
The big concern with most seniors is that if they take a reverse mortgage, their Social Security and Medicare-or any other benefits the government issues them for their welfare-would be affected. Fortunately, the cash coming from a reverse mortgage is considered non-income, hence not affecting one’s eligibility for Social Security and Medicare. If the proceeds of a reverse mortgage were used towards specific ends, such as financing health care, they could affect one’s eligibility for Medicaid since Medicaid is need-based. It always is wise to see a financial advisor who can provide a fuller idea of the implications involved.
- Myth: Reverse Mortgages are only Available to Good Income Homeowners or Good Credit
Credit checks or proof of income need not be brought into this decision-making process for a pay-out on a reverse mortgage. The only imperative qualifications for the issuing of this loan are age and home equity, maintaining the home. It is highly dependent on the equity of the home and the age of the homeowner, such that many with very minimal incomes can easily qualify as long as they are within the age group and own their homes or have considerable equity therein.
- Myth: Your Heirs Will Be Left with Nothing
It would seem people think that once a reverse mortgage is taken on the home, the heirs inherit absolutely nothing. That is true to some extent, but at the death of the homeowner or when no longer occupying the home, the loan gets repaid; it doesn’t mean your heirs cannot inherit the home. In fact, if they need to keep the home, the estate can pay off the remaining balance of the loan upon the death of the homeowner. They may sell the house and pay off the balance; if they do not want to pay off the loan, they retain any equity. And sometimes, at the time of sale of the house, if the amount that comes out from the sale is not adequate to pay off the loan balance, then the lender has to suffer the loss because usually, heirs are not responsible for the deficiency in the balance.
Reverse Mortgage Benefits
Financial Flexibility: Ongoing flowing income without any monthly payments pays quite a bit of utility to retirees, especially those who need help in meeting living expenses, health care, or other needs.
Stay in Your Home: The reverse mortgage allows the senior to stay in his home and draw upon the equity he has built up over time and without having to scale down or relocate.
Non-Recourse Loan: As identified above, HECMs are non-recourse loans, which simply mean that the homeowner or heirs will not owe more than the value of the home when it is sold.
No Monthly Payments: Reverse mortgage borrowers are exempted from the monthly payments, hence liberating the fixed incomes .
When is a Reverse Mortgage Right for You?
A reverse mortgage would be a good option when the senior citizen needs to get to some or all of the equity in his home and does not want to leave the home. It’s just not appropriate for anyone, any way-the product is not. It’s a major decision that means weighing just how much money you need, within what timeframe and factoring in the condition of your home as well as your preferences on its distribution following your death.
How to Decide
Seek a certified financial planner or a reverse mortgage counselor. They would assist in making your decision whether a reverse mortgage is right for your situation
Conclusion
In fact, reverse mortgages have always been steeped in myths that water down any potential value. Only by way of clearing these myths into facts will seniors be able to make an informed decision as to whether or not reverse mortgages have a place as a tool for financial security in retirement. Weighing pros against cons and consultation with trusted advisors are the usual ways to ensure a reverse mortgage is right for your future.
