Confused by reverse mortgages? Then it is highly likely you’ve heard or read a couple of reverse mortgage myths that you ended up believing. However, that shouldn’t worry you. In fact, even mortgage experts agree that these loans are quite complicated.
That said, there is great confusion surrounding reverse mortgages – meaning that most people don’t understand how these loans work. When you consider the rules governing these loans and how they tend to change regularly, you will start to understand why there are so many myths and misconceptions about them.
Following below are some of the most common reverse mortgage myths you’ll come across, as well as a couple of things you should know if you are seriously considering getting one of these loans.
Read on to learn more:
COMMON REVERSE MORTGAGE MYTHS AND MISCONCEPTIONS
- Home Ownership
For starters, most people assume that the lender will automatically own the property as soon as the mortgage closes.
However, the fact is that once you complete the mortgage, you will still retain ownership of the home throughout your life. You will receive the title to the house, as well as all the homeowner benefits accruing to you – much in the same way as if you never actually completed the mortgage.
For example, if you want to sell your home, you will still be able to do so. The loan will, however, come due should you opt to put the home on the market. This means that you’ll have to pay your HOA, real estate taxes, and homeowners’ insurance. You will also be required to have the home you took out the reverse mortgage on as your primary residence.
As long as these conditions are satisfied, then the loan won’t come due.
You should also keep in mind that lenders are not in business to own homes. Rather, their focus is to issue loans and earn an interest on the same. Homeowners, to this end, retain the title to their house in their name. However, the lender will add a lien to the title to ensure that they are guaranteed that they will be paid back the amount they lent.
- Impact on Medicare and Social Security
Another myth floating around says that the reverse mortgage will impact your Medicare and Social Security since you will be accessing funds you didn’t previously have.
However, this is just that – a myth. Once you complete the loan, you will essentially be releasing home equity. As such, these funds will not be considered as earned income. Consequently, all proceeds from getting the reverse mortgage closed will have no bearing whatsoever on your Medicare or Social Security payments.
Typically, these entitlement programs are considered safe by industry professionals and experts. Additionally, you won’t lose any benefits. For further peace of mind, you should get in touch with your tax professional.
Government entitlement programs – such as Medicare and Social Security won’t be affected by your reverse mortgage. However, a couple of need-based programs (such as Medicaid) might be affected.
To know your options, you should get in touch with a qualified and certified financial adviser. They will provide you with more information about how the reverse mortgage you intend to apply for could impact your eligibility into some of the benefits established by government.
The third myth asserts that reverse mortgages are just scams that have been floated around the fleece seniors of their hard-earned savings and home ownership.
Did you know that the federal government insured every reverse mortgage? Essentially, this insurance is designed to make sure that homeowners aged 62 and above will never have a bank fail in case they choose installment payments or a line of credit.
Further, you need to understand that reverse mortgages are categorized as non-recourse loans. This means that you will never owe the lender more money than your property is worth.
In this – as in other factors – reverse mortgages are fantastic financial products for those who are looking to access funds without necessarily increasing their financial obligations.
Certainly, like with any other industry, there have been a couple of reverse mortgages firms that have tricked seniors and causing them to sign up for life insurance or an annuity by adding these contracts smack in the closing documents of the mortgage.
To protect yourself from such unscrupulous companies, you should do due research before you sign up with them. Check on Google for reviews posted by other customers, and go through any complaints that might have been filed by the Attorney General to discern whether the company you wish to work with is legitimate.
Yet another one of the common reverse mortgage myths floating out there will have you believe that it is impossible to use the proceeds from the loan as you see fit.
The fact, however, is that you can use proceeds from reverse mortgages in any way you desire. Whether you are looking to purchase collectibles, send your grandkids to college, set up a trust for those you love, take that dream vacation, or simply enhance your retirement or savings accounts, the onus is on you.
Did you know that you even have the power to use the proceeds to buy another home? As long as the home on which you took out the loan is still your primary residence, there is nothing that can stop you from putting the loan to work for you.
Some people also believe that they simply don’t have a big enough income to qualify for reverse mortgages.
Basically, reverse mortgages were designed as a financial product for people aged 62 years and above. It is common knowledge that the great majority of people over this age have limited income earning capabilities. In fact, most of them subsist off social security.
As such, it is not surprising that many seniors falling within this age group actually qualify for these loans. Unlike with refinance or a traditional mortgage, you won’t have to make mortgage payments. Therefore, the criteria for these loans are quite unlike the other home mortgage products currently available on the market.
- Unbiased Information
Some people opine that there is no way through which they can get unbiased information about these mortgage loans.
To move forward with reverse mortgages, one of the requirements is to receive independent counseling as approved by the Housing Urban Development agency (HUD).
There are tons of these HUD-approved facilities around the country, and you should be able to find one close to you. Alternatively, you can simply place a call to the closes facility to learn more.
By getting in touch with these facilities, you will receive the information you need to better understand both the cons and pros of applying for and receiving a reverse mortgage loan. The experts manning the HUD facilities will also provide you with information, tips, and tricks that are completely unbiased.
- Previous Mortgages
Among other reverse mortgage myths, one claims that you won’t qualify for a loan if you are not yet done paying off your house.
The fact of the matter, however, is that few homeowners are done paying off their homes. As such, the entire point of a reverse mortgage wouldn’t make sense if this myth was true.
To this end, you should understand that you don’t necessarily have to have paid off your mortgage to apply for and receive a reverse mortgage. The only requirement is that your need to have decent equity on the property.
Not surprisingly, you might also want to know that reverse mortgages are typically in the first lien position. This simply means that if you already have enough equity and the reverse mortgage can pay off the existing loan, then you will in all likelihood qualify for a new loan.
Some people also think that their reverse mortgage will come due in case they end up living longer than they anticipated.
However, this is just another one of the reverse mortgage myths you should ignore. In fact, you should keep in mind that your mortgage won’t come due since these types of loans have no time limit attached.
Of course, some lenders are going to mature the mortgage when you hit the 150-year old mark. Others, however, have no time limit, so you shouldn’t be worried.
Another common myth will have you believe that only those who run out of money need reverse mortgages.
Many homeowners have started taking advantage of reverse mortgages if only to reduce their monthly bills. This, you should keep in mind, is regardless of their personal financial situation.
In turn, the loan opens up some free flow of cash that the successful applicants can use for investing in savings and retirement accounts, as well as to ensure they remain liquid.
Actually, getting a HECM for purchase will allow you to put down around 40 percent of the value of your home and not have to worry about mortgage payments. Instead of putting down the entire value of your home down, using a small fraction will allow you to get the liquid funds you need.
- Professional Opinion
It is also commonly misconceived that CFPs (certified financial professionals) are against reverse mortgages.
However, this isn’t the case. In fact, highly designated financial professionals are now coming to respect reverse mortgages more and more. This is on account of the fact that reverse mortgages are unique financial products that are in a class of their own.
Further, these loans play a crucial role in supporting seniors and ensuring a worry-free retirement for those above the age of 62.
Some assume that getting a reverse mortgage means that their heir won’t inherit the home.
This is a common reverse mortgage myth you should ignore. The truth is that your estate will still inherit your house as it is. However, the title will have a lien for the full amount of the loan you received, as well as any additionally mortgage insurance premium and interest you accrued.
For instance, if you took out a reverse mortgage and you owe the lender $55,000 after 6 years. At this point, you pass away and your estate sells the home for $300,000. Your heirs will inherit $254,000 and only $55,000 will go to the lender.
As a non-recourse loan, a reverse mortgage is protected. This means that the borrower and their estate will not owe the lender more than the value they took out a loan for, or the total balance remaining.
It also follows that no other assets – apart from the home – can be used to clear the debt. Non-recourse, to this end, simply means that if the borrower or their estate fails to pay the balance when it is due, the only remedy the lender has is foreclosure. The borrower, on the other hand, will not be held liable for any arising deficiencies that might be brought about by the foreclosure.
Another common reverse mortgage myth is that homeowners might get forced out of their home.
The truth, however, is that reverse mortgages were created to allow seniors to continue living in their homes over their twilight years. As such, you can be sure that the lender will not foreclose your home or evict you as long as you continue meeting the obligations of the mortgage.
For instance, you are required to continue living in that property as your primary residence, maintain the property according to the requirements dictated by the Federal Housing Administration, and continue paying the required homeowner’s insurance and property taxes.
Among the other reverse mortgage myths persistent out there is one that says homeowners are required to pay taxes on reverse mortgages.
However, this isn’t the case. In fact, the proceeds you get from the mortgage will not be taken as income. As such, they cannot be taxed. For more information, please consult a certified tax adviser.
Over and above everything else, there are a whole lot of reverse mortgage myths out there. Use the guide above to help you debunk these myths and misconceptions. We hope this information was helpful and that you now have an improved understanding of reverse mortgage.