Although the reverse mortgage program is supported by the Federal government and the loans have been available for nearly 60 years, reverse mortgages have not consistently been used as a financial planning tool. That’s changing, however, primarily because of consumer protections, including limits on loan proceeds, required counseling and the addition of a Financial Assessment, that are part of the program. Some have been added during the last several years.
These requirements, coupled with rising home prices and increased awareness of the importance of home equity in an overall financial plan, have helped move reverse mortgages into a mainstream option for many retirees.
Despite the myriad benefits of reverse mortgages, myths about the product continue to persist. We spoke to reverse mortgage experts to learn more about the product’s advantages and set the record straight on three common misperceptions.
But, before we do it’s important to define what a reverse mortgage is and how it works. According to the consumer education site from the National Reverse Mortgage Lenders Association, "a reverse mortgage is a loan available to homeowners, 62 years or older, that allows them to convert part of the equity in their homes into cash… The loan is called a reverse mortgage because instead of making monthly payments to a lender, as with a traditional mortgage, the lender makes payments to the borrower. The borrower is not required to pay back the loan until the home is sold or otherwise vacated. As long as the borrower lives in the home he or she is not required to make any monthly payments towards the loan balance. The borrower must remain current on property taxes, homeowners’ insurance and homeowner’s association dues (if applicable)."
Myth No. 1: Reverse mortgages are a last resort.
Fact: Traditional perceptions of reverse mortgages have suggested that it’s a product to be used when all other accounts and options have been exhausted. The reality is that this could not be further from the truth. Today, reverse mortgages are often viewed as a valuable tool that can be used earlier in retirement planning to supplement future needs, help boomers age in place and serve as a source of income to be tapped when other invested assets underperform.
One reverse mortgage lender told us that reverse mortgages are not an 11th hour loan. Instead, they should be viewed as an opportunity to incorporate some of the equity built up in the home to fund many different needs.
Myth No. 2: Reverse mortgages can only be used to refinance an existing home and can’t be used to buy a new house.
Fact: Older homeowners looking to right-size their living situation to match their current phase of life earnings may not know that they can use the funds from a reverse mortgage to fund the purchase of a new home.
Often boomers will use proceeds from the sale of an existing home to purchase a new property or they may decide to take on a new mortgage with terms as long as 30 years. For people who would prefer not to use the full amount of the sale of their prior residence toward the purchase of a new home, a reverse mortgage for purchase can be a good option. While these loans typically require a down payment that is between 45 percent to 62 percent of the purchase price, the rest of the funds for purchase come from the reverse mortgage. This allows buyers to keep more assets to use as they wish, as compared to paying all cash. And they still have the flexibility of no required monthly mortgage payments.
There are no preset terms of a reverse mortgage for purchase. The borrower can remain in the home even if the available income stream from the reverse mortgage is exhausted. Homeowners are still responsible for paying property taxes, insurance and maintenance and must live in the property as their primary residence. With no monthly payment required, the loan balance, including principal and interest, increases as long as the borrower lives in the home. A borrower may choose make payments on the mortgage balance.
Myth No. 3: The bank takes your house.
Fact: Of all the misperceptions associated with reverse mortgages, this myth is perhaps the most pervasive.
A reverse mortgage does not automatically result in a transfer of title to the bank; the deed remains in the name of the borrower for the life of the loan and beyond.
However, reverse mortgage borrowers must maintain the property and continue to pay the required insurance and taxes. If the borrower sells or otherwise vacates the property, the mortgage is treated as any other with the borrower or heirs being required to pay off the existing loan.
Worth noting is that if the borrower owes more than the value of the property, the lender looks only to the value of the property to satisfy the lien. Because all reverse mortgages are non-recourse loans, heirs are protected from assuming any additional deficit beyond the value of the property. Boomers can remain in their homes with the peace of mind that their heirs will not be responsible for any debt associated with the loan beyond the value of the home.
Bottom line: While these are just three of the most common myths associated with reverse mortgages, homeowners considering one would do well to further research the product to determine whether it meets their needs (www.reversemortgage.org is a good place to start). Reverse mortgage lenders also encourage potential clients to consult family members, financial advisors, tax attorneys and other estate professionals before proceeding with an application. Due diligence is always key.