Let’s face it – reverse mortgages have traditionally not had such a stellar reputation. Most people eligible for a reverse mortgage shy away from considering a reverse mortgage at the mere mention of the word. But the vast majority of horror stories you have heard are probably overblown or, at least, very misunderstood.
While a reverse mortgage may not make sense in every situation, a reverse mortgage is a very wise and sound financial decision for millions of senior homeowners, and just a few minutes of education is all that stands in the way of determining whether you are one of those that could greatly benefit.
How Does a Reverse Mortgage Work?
Before we dive in too deep, let’s define what a reverse mortgage is: In its simplest form, a reverse mortgage allows homeowners aged 62 and older to access the hard-earned equity in their home while they are still living in the home. Drawing cash from your home using a reverse mortgage is a loan that you will never have to pay back for as long as you (or your surviving spouse) live in the home.
To put it another way, you have worked your whole life making mortgage payments with the goal of paying off your home while building significant equity (your principal payments along with your home’s appreciation). The only way to truly “cash out” your equity in a home is to sell it. But this is your home, where you have set down roots and where you feel comfortable, do you really want to move somewhere else?
A reverse mortgage allows you to cash-out some of the equity in your home while you still live in the home, allowing you the freedom to enjoy a better retirement with increased monthly cash flow to live the way you really want to, or a line of credit to draw upon for investing, cash for large expenses or in case of emergency or other unplanned events. Oh, and by the way – since this was YOUR money all along, you NEVER have to pay it back. (More on that later.)
That said, here are X myths about reverse mortgages that can help you decide if it is the right move for you.
Myth 1: With a Reverse Mortgage, I Would no Longer Own My Home, Right?
This is perhaps the biggest misconception, and it is not true. Actually, this is where a reverse mortgage is quite similar to a traditional mortgage. YOU (and your spouse) still own your home, you (and your spouse) alone hold the title to YOUR home. The reverse mortgage lender, just like a traditional mortgage lender, will attach a lien on your home that will need to be satisfied when ownership of the home changes hands – again, just like a traditional mortgage lender would. The home remains yours to do what you want with.
You (and your spouse) have the right to own and occupy your home as long as either of you are alive and you will never need to make another mortgage payment.
Myth 2: When I Die, My Spouse Will Be Kicked Out of Our Home
Of course not. As long as you and your spouse are both legal owners of the home and are living there (see above), BOTH of you have the right to occupy the home for as long as EITHER of you are alive, regardless of whether one spouse passes before a surviving spouse.
Now, this is as good a place as any to discuss the three ways that you actually CAN forfeit ownership in your home. None of these should come as a surprise to you as they all relate to standard foreclosure laws and are the same as with any traditional mortgage.
Your home can be subject to foreclosure for the following reasons:
1. You fail to pay property taxes and homeowners insurance on the home.
2. You allow the home to fall into such disrepair such that the appraisable value is significantly lower than when you started.
3. You and your spouse have passed, and after ownership transfers to your heirs (see below) your heirs decide to do nothing with the home and allow the reverse mortgage lender to foreclose on the home. (I hope this never happens, but I am sure it does. Family is ... complicated?)
That’s it. Again, it’s your home until you die OR decide you no longer want to live there and sell it.
Myth 3: When I Die, The Bank Assumes Ownership of My Home
This is also not true. As stated above several times, YOU own your home until you and your spouse have both passed, at which time ownership of the home actually transfers to YOUR HEIRS. Since you and your spouse no longer occupy the home, the reverse mortgage lender will then seek to collect the balance of your reverse mortgage from your heirs. Your heirs can then do one of three things:
1. RETAIN ownership of the home by either paying off the reverse mortgage outright or through a refinance with a traditional mortgage to satisfy the reverse mortgage balance. Remember, since your heirs own the home, this is a refinance transaction as opposed to a sales transaction. Your heirs can then enjoy the home indefinitely. (Your heirs usually have 6 months to do this.)
2. SELL the home and with the proceeds of the sale pay off the reverse mortgage balance and divide the remaining proceeds among all heirs. (Many lenders allow up to 12 months to sell the home before demanding payment.)
3. NO NOTHING This is the least sensible option since doing nothing will force the reverse mortgage lender to foreclose on the property and retain all proceeds. Again, I am sure it happens, but I hope it never does.
Myth 4: I Won’t Be Able to Leave an Inheritance for My Children
Again, this is simply not true. Of course, the size of any future inheritance can vary wildly, but since reverse mortgage lenders only allow you to withdraw a fraction of your home’s equity, , even if you have withdrawn the maximum amount allowed by your lender, there is still likely a sizable amount of remaining equity that your heirs can receive once they sell the home (or they can retain the home through a refinance at a fraction of the value to satisfy the reverse mortgage balance).
Additionally, some people opt to take a lump sum payout and invest those funds and realize a return that could outperform the housing market, leaving their children an even larger inheritance. Greg Black, a certified financial planner at Tencap Wealth Coaching LLC thinks that “…reverse mortgages are an often misunderstood but powerful tool that, when properly used, can yield great benefits to multiple generations.”
Of course, this is a key consideration for anyone looking to take out a reverse mortgage: How much do I want to leave my children as an inheritance versus how much money will I need to live the rest of my life the way I want? I advise my clients to live a comfortable (not extravagant) life and, in most cases, one of the best uses of your discretionary money is to use it for memorable events with your children and grandchildren – enjoy it with them while you are still here!
Myth 5: I Won’t be Able to Pay the Loan Back
A reverse mortgage never needs to be “paid back” by you unless you decide to move to a new home, sell the home or allow the taxes and insurance to lapse. Otherwise, the reverse mortgage lender has simply provided you with access to YOUR equity that you have built in YOUR home. The lender merely converted your equity into cash and allowed you to use it however you see fit in exchange for the right to collect that money back (plus interest) upon the sale of your home after you die.
You never need to make a monthly payment. In fact, you can even opt for the lender to pay you a fixed amount each month if you so desire. You can also opt to take out all your equity in a lump sum, or leave your equity in a line of credit you can draw on whenever you need it. It’s your money, so use it however you want to, with no worry about having to pay it back!
Myth 6: If the Housing Market Crashes, I Will Lose My Home
Reverse mortgage lenders will only allow you to withdraw a portion of your home’s total equity, leaving them with enough “cushion” to guard against any property devaluation that might occur. Additionally, when you take out a reverse mortgage (also known as a Home Equity Conversion Mortgage, or “HECM”) you will be required to pay for a mortgage insurance policy. In a traditional mortgage, mortgage insurance is used to insure the lender in case the borrower defaults on their loan. With a reverse mortgage, the mortgage insurance policy protects you, the homeowner, against a devaluation of your property that could result in you taking out more in equity than the house is currently worth. This can be one of the best insurance policies you ever buy as it potentially protects you against hundreds of thousands of dollars in lost equity.
In short, no - you will cannot lose your home solely because of a housing market crash.
Myth 7: The Reverse Mortgage Industry Is Full of Scammers
While reverse mortgages have received a lot of negative press in the past, the truth is that there is a significant amount of regulation governing the reverse mortgage industry, and only licensed professionals are authorized to work with and advise reverse mortgage clients. Additionally, reverse mortgage products are insured by the Federal Housing Authority (FHA), which requires all reverse mortgage consumers to attend an education session to ensure that they are well-versed in all aspects of the program to help guard against unscrupulous agents. Lastly, there has been significant legislation and regulatory requirements put in place since 2008 industry wide that has tremendously benefitted and protected consumers.
Tips for Avoiding Reverse Mortgage Scams:
Do not respond to unsolicited advertisements - seek out your own reverse mortgage counselor and ask for references.
Do not sign anything that you do not fully understand.
Know your rights as a consumer and question, question, question!
Your best bet is to seek out a trusted, established and reputable firm like CloseYour Mortgage who is invested in their clients’ long-term financial health. Reach out and talk with one of our licensed mortgage professionals to see if a reverse mortgage is a good option for your situation.
Bottom Line
A reverse mortgage is an often misunderstood but very powerful tool that can be used to help seniors realize their financial goals and live their fullest life. For most people, a home represents their single largest investment, but how to get the most out of that investment can be a challenge. While a reverse mortgage may ultimately not be an ideal fit for everyone, all seniors owe it to themselves to become familiar with reverse mortgages and understand how they might help. In many cases, a reverse mortgage can be life-changing.