Though reverse mortgages have been around for decades and are subject to increased safeguards and oversight, they remain the least popular method for extracting equity from a home. In fact, according to a 2020 report by the Urban Institute, which drew data points from the Home Mortgage Disclosure Act, in 2018, only 1.3% of equity loans were home equity conversion mortgages (HECMs).
While reverse mortgages have long been safe financial tools, misconceptions about reverse mortgages persist. Understanding what prevents people from considering reverse mortgages may give some insight into why these useful retirement planning tools haven’t caught on in the mainstream. The following are three misconceptions that may deter borrowers from looking into a reverse mortgage and help to explain why reverse mortgages aren’t more popular.
1. Borrowers Don’t Understand How Reverse Mortgage Work
Even though reverse mortgages have been around since 1961, many borrowers are confused about what they are and how they work. They may have heard media coverage of people who had bad experiences or have misconceptions preventing them from considering a reverse mortgage. While it may be true that some past practices contributed to giving reverse mortgages a bad reputation, there isn’t anything inherently wrong with the loans themselves.
In fact, for homeowners with substantial equity, a reverse mortgage may offer a feasible way of staying in their home as they age. These non-recourse loans are government-backed and have strict borrower protections to ensure people don’t enter a loan they don’t understand or that isn’t in their best interest.
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2. Financial Advisors Have Only Recently Started Recommending Reverse Mortgages
People who employ a financial advisor tend to rely on their advisor to come to them with financial products rather than the other way around. According to a 2022 Harris poll of 2,000 U.S. homeowners, 90% of those surveyed expected their financial advisor to recommend products. At the same time, the survey revealed that only 29% of those surveyed had actually spoken with their financial advisor about a reverse mortgage.
There are several possible explanations for the disconnect between customer expectations and advisor actions:
- Lack of education. Though potentially in the best interest of their clients, advisors are unlikely to recommend a product they don’t understand or have confidence in.
- Job restrictions. Some banks no longer offer reverse mortgages. Financial advisors employed by those banks aren’t at liberty to offer a product their employer doesn’t carry or endorse.
- Fear of pushback. Bringing up a reverse mortgage as a potential retirement strategy comes with a risk of pushback or even loss of trust from misinformed clients who have bought into the myths about reverse mortgages.
3. Homeowners Want to Pass on Their Homes to Heirs
Some people fear that a reverse mortgage will mean their children won’t inherit their home or get any inheritance when they die. While this is not entirely correct, there is some truth to it. The truth depends on several factors, including the financial situation of the borrower and their heirs.
A reverse mortgage comes due when the last borrower dies or leaves the home. Heirs to a reverse mortgage must pay the balance. They can do so in one of three ways: Pay the lender back in full, sell the property, or refinance the mortgage. Lenders will generally require that the heirs settle the loan within the year.
While it’s possible to pay off the loan, the most practical option is often to sell the home. This does not necessarily mean there will be no inheritance. The heir will receive the home sale proceeds after the balance is paid. They will also receive any additional assets in the estate. Because the loans are non-recourse, heirs will never owe more than the value of the home when it is sold to satisfy the balance.
Because the estate and financial situation of each person is different, it is impossible to give a blanket explanation of any loan’s outcome. However, in some cases, it’s possible to take a reverse mortgage and put safeguards in place so heirs can keep the property. Before making any decisions, it’s wise to discuss your circumstances with a financial advisor. A finance professional can help you strategize your estate and retirement plans. It’s also worth discussing your hopes with your heirs to ensure everyone is on the same page.
Takeaways
Though reverse mortgages represent only a small percentage of the mortgages taken every year in the United States, they do offer a viable retirement planning strategy to many people. Before dismissing the possibility, take some time to research and look into what a reverse mortgage could offer your retirement. While reverse mortgages aren’t popular today, that is likely to change in the coming months and years as their many benefits become more widely known.
Seniority is published by Finance of America Reverse LLC. The views expressed in this publication are those of the author alone and do not necessarily reflect the views and opinions of Finance of America Companies. 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.
