Reverse mortgages tend to be a polarizing topic. Bring them up and you’re sure to hear a lot of opinions, many of them negative, and many of them untrue. Though they’ve fallen prey to bad press and misunderstandings, used properly, reverse mortgages can be helpful financial tools. Before dismissing them altogether, it’s worth taking a closer look at the facts and learning the truth for yourself.
Here are ten myths commonly repeated about reverse mortgages and the real truth about these highly regulated financial vehicles.
1. The Bank Owns Your Home
False. A reverse mortgage is a loan and does not require the borrower to transfer the title to the bank. While there is a persistent myth that reverse mortgage borrowers give up their title or ownership of the home as part of the reverse mortgage contract, this is untrue.
Like a traditional mortgage, when you take a reverse mortgage, the bank places a lien on your home. If you default on the terms, the lien enables the lender to foreclose on the home in order to be repaid. That lien itself, however, does not mean you give up ownership of the home.
2. You Can’t Get a Reverse Mortgage if You Have a Mortgage Already
False. In fact, many retirees use reverse mortgages to pay off their traditional home loans. While you can get a reverse mortgage if you already have a mortgage, that balance of that mortgage will need to be paid off, typically with the proceeds from the reverse mortgage.
To get a reverse mortgage, you will need a significant amount of equity in the home. If you have a mortgage in place, this amount will be subtracted from the value of the home to determine how much equity you have. The Department of Housing and Urban Development (HUD) requires borrowers to have “substantial equity” for a reverse mortgage but also looks at other factors as part of the approval process. How a substantial amount of equity is defined has some ambiguity around it. The general rule is the homeowner owns the house outright or has at least 50% equity to qualify for a reverse mortgage. HUD also dictates other requirements that lenders must consider when determining eligibility. These include borrower age, home value, current interest rates, your ability to pay property taxes and home insurance, as well as the selected reverse mortgage payout structure. For home equity conversion mortgages (HECM), regardless of equity, HUD caps the loan limit at $1,089,300 for 2023.
3. Out-of-Pocket Costs Are Excessive
False. While it is true that like a traditional mortgage, reverse mortgages do have costs and fees, most of them are the same as you would pay for any mortgage. The good news is you can roll most of these expenses into the loan, which reduces out-of-pocket expenses. Many borrowers pay few to no fees out of pocket.
Your lender should provide you with a detailed cost breakdown that explains the different interest and pricing options, closing costs, and fees, which can vary based on loan type and size.
4. Heirs Can’t Inherit Your Home
False. Heirs can inherit the home; however, they will be responsible for paying off the reverse mortgage if they want to keep it. A reverse mortgage typically comes due upon the last borrower’s death. Coming due means that the loan needs to be paid. Usually, this is done by selling the home. The proceeds of the sale pay off the loan, with any excess going to the heirs. However, if heirs wish to keep the home, they have the option of paying off the reverse mortgage. Although it is always an option, in many cases, paying off the loan to keep the home is unrealistic or undesirable.
A key point to remember is that reverse mortgages are non-recourse loans. If the loan balance is higher than the home’s value, heirs will not be responsible for paying back more than the current market value of the home.
5. Reverse Mortgages Are a Scam
False. The most common type of reverse mortgage, the Home Equity Conversion Mortgage ( HECM ) is insured by the FHA . It is true that lack of . Reverse mortgage counseling, financial assessments, protection for non-borrowing spouses , disclose costs are some of the safeguards that help ensure borrowers fully unders tand the ir loan term s.
6. Reverse Mortgages Only Make Sense in Desperate Situations
False. Reverse mortgages are generally not a good option for people with severe financial issues. In fact, to qualify for a reverse mortgage, borrowers must undergo a financial assessment to determine if they are financially able to meet the terms of the loan.
People who can’t afford the upkeep of their homes or are unable to pay property taxes or home insurance are likely to be ineligible for a reverse mortgage. Though these financial vehicles offer some homeowners a way of tapping the equity in their homes for additional security in their retirement years, they are not meant for people in desperate financial situations.
7. You Have to Pay Taxes on Proceeds
False. Because a reverse mortgage is considered a loan , a ny proceeds received are not classified as income by the Internal Revenue Service (IRS), and therefore not subject to income taxes. That doesn’t mean reverse mortgage borrowers aren’t subject to any taxes at all . For example, as homeowners, reverse mortgage borrowers must still pay property taxe s.
8. You Can’t Sell Your Home
False. Reverse mortgage borrowers can sell their home at any time they choose. A reverse mortgage borrower retains the title to their home and all the rights that come with it. There are no prepayment penalties for selling the home or paying off the mortgage.
Keep in mind, however, any home sale will require paying off the reverse mortgage. At closing, borrowers are required to pay the reverse mortgage loan balance plus interest and fees.
9. Your Government Benefits Will Stop
False. Government entitlement programs whose eligibility is dependent on factors like age and work history (Social Security and Medicare) are not affected by a reverse mortgage.
Beware, however, that cash from need-based programs like Medicaid could be impacted by a reverse mortgage since payments may be considered assets.
10. You Will Be Kicked Out of Your Home
False. borrowers stay in their home s . In a traditional home mortgage , if you fail to make monthly payments or uphold the terms of the loan , you may face foreclosure . The same is true of a reverse mortgage if you fail to uphold the terms of the loan.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.