There’s a lot of misinformation going around about reverse mortgages. We aim to set the record straight.
Misinformation: The Lender Owns My Home Now
Fact: False. You actually retain your title and said ownership to your home over the entire course of the loan. You also get to enjoy any appreciation on your home until all borrowers leave the home. You can also decide when and if you sell it at any time. You are responsible for maintaining the home and paying your property taxes and insurance payments, however; which are standard clauses in any home loan. A reverse mortgage is just a mortgage loan with one more payment option – the no payment option.
Misinformation: My Kids Will Have To Repay My Loan
Fact: False. This is entirely untrue. Reverse mortgages are in a category of non-recourse loans. What this means is that if the owner passes away or abandons the property, it’s sold to repay the debt with no debt liability of any type remaining debt being left to family members. Additionally, any remaining equity including appreciation will go to your heirs if they so choose. The cap on the amount owed is limited by the market value of the home. In other words, even we experience another housing value crash similar to 2008, if the amount of your loan exceeds the value of the home, your heirs can still buy the home for 95% of the then current market value.
Misinformation: They Are Expensive
Expensive? Compared to what other loan you effectively don’t have to pay back (in your lifetime)? Rates are comparable to prevailing mortgage rates. Like with any Government Insured FHA loan, you are required to pay mortgage insurance, but again it’s rolled into the loan and never paid back unless you desire to make payments or is paid out of your estate. Also, since you still earn the appreciation on your investment despite using the equity that paid for the investment, it may be cheaper than drawing money out of your retirement accounts as that money used will no longer see a return.
Misinformation: You Can’t Get A Reverse Mortgage If You Have a Mortgage
Fact: False. In actuality, if you have substantial equity, you can get a reverse mortgage. But this mortgage must retain the first lien position, which means that your existing mortgage would have to be repaid out of the proceeds of the loan, with the difference, after closing costs, going to you. The leading reason why most people take out reverse mortgages is to actually pay off their existing mortgage. Some people choose to keep making the same payment on the new loan, others choose to pay interest only or make sporadic payments, but most choose to make no payments at all.
Misinformation: If You Are Not Low Income, You Do Not Qualify
Fact: False. There are no income or credit requirements on reverse mortgages. In fact, a lot of older Americans take them out just to add to their nest egg and further safeguard their retirement. Credit comes in to play in that if you have a history of not paying your bills, the program may require set-asides under Financial Assessment rules may be required to pay your property taxes. Credit will not disqualify you, but it may require set-asides or impounds to ensure you won’t lose the house to a tax lien.
Misinformation: If I Live Too Long I Can Get Evicted
Fact: False. You cannot get evicted regardless your age. Provided you adhere to the rules of your loan which primarily requires that it remain your primary residence (6 months per year or more), and that the home be maintained with the property taxes paid. There is nothing that can be done to evict you from your home and the requirements vary little from a traditional mortgage.
Misinformation: I Can’t Use The Money On What I Want
Fact: False. It is your money. You can do as you see fit with it. Whether you want to remodel your home, pay for your child’s wedding, go on vacation, stash the money in a bank account, open a business with no capital costs, use part of the proceeds to by a vacation home and have no payments on either home, or what-have-you, there are no restrictions on what you can do with your funds.
It’s important to consider a Reverse Mortgage for almost anyone’s retirement strategy. For one, it’s the biggest pool of funds you have to access, and the only source where you still earn the return on your real estate investment while being able to use your accumulated equity. Two, rates are comparable to traditional mortgage with both fixed and variable rates available depending on how you prefer to draw funds, whether in a lump sum or in smaller monthly stipends like an annuity.
As you can see, there’s quite a bit of misinformation about reverse mortgages. It’s always helpful to conduct proper due diligence before making your decision. A reverse mortgage is the least understood, most beneficial government insured program for seniors. It was designed specifically to help retiring seniors maintain their home ownership throughout their life, while being able to access the equity from the home to pay for a better standard of living during retirement, without ongoing payments on the loan. With retirement lasting 30 years or more with no uncertainty regarding health, costs or life expectancy, the possible necessity for assisted living, or just not having enough saved, it’s a prudent line of credit to have in your back pocket, even if you expect never to use it. The time to make complex financial decisions is not in a time of crisis, as it is better to be prepared for crisis to avoid it altogether!