Learn the truth about reverse mortgages
Well, much like our perception of food was a little off as kids, many people’s perception of reverse mortgages isn’t exactly true. We’re going to take a look at some common myths about reverse mortgages and share the truth about them so you can stay informed.
MYTH: The bank gets your home after you pass away
TRUTH: The federally insured reverse mortgage program has been around for over 30 years, but giving up the title at closing or if the owner passes away has never been part of the process. The homeowner or their estate will hold the title throughout the life of the loan and can sell it at any time with no prepayment penalty.
But why does this continue to be a top misconception? Historically, homeowners have used reverse mortgages to utilize large amounts of their home equity upfront. After the great recession, heirs often found that there was no economic advantage to selling the home after the last homeowner passed away. In those cases, the heirs could walk away or sign the deed over to the lender with no penalty towards them for the deficiency. Ultimately, the borrower borrowed more than the home could satisfy with a sale.
MYTH: You can owe more than the value of the home
TRUTH: Many people assume the estate will be “underwater” when they sell it or when they pass away. Fortunately, reverse mortgages include a “non-recourse feature,” ensuring that the homeowner and their estate will never owe more than the value of the home at the time it is sold.
MYTH: The heirs get stuck with a bill
TRUTH: The heirs are protected by the non-recourse feature, just like the homeowner. They can sell the home or, if qualified, refinance in their own name. But the home itself is ultimately responsible for paying back the loan balance, and any remaining equity would be theirs to inherit.
MYTH: You might outlive a reverse mortgage
TRUTH: Even though the age limit is listed as the youngest borrower’s 150th birthday, if someone were to actually live that long, FHA would continue servicing the loan at that point. (But we don’t think this is something to worry about).
MYTH: Reverse mortgages are expensive
TRUTH: Yes, there are costs that come with reverse mortgages, BUT what you are buying is extremely valuable – a non-recourse loan at competitive rates. They also typically don't require a monthly principal and interest mortgage payment during your lifetime*. When used for a homeowner who wants to stay in their home, they are definitely pretty affordable.
*Borrower is required to pay all property charges including, but not limited to, property taxes, insurance, and maintenance.
MYTH: They are just for the desperate and needy.
TRUTH: No matter your financial situation, reverse mortgages can be a viable option. There are multiple financial planning options, and when used properly, a reverse mortgage can increase cash flow, potentially reduce taxes* and increase your net worth.
*Not tax advice. Consult a tax professional.
MYTH: They increase your risk for foreclosure.
TRUTH: Reverse mortgages do not require monthly principal and interest mortgage payments*. That means your property taxes are the main thing you need to remember to pay to avoid defaulting on your loan. When using a reverse mortgage properly, you can reduce your likelihood of foreclosure!
This material has not been reviewed, approved, or issued by HUD, FHA, or any government agency.
*Borrower is required to pay all property charges including, but not limited to, property taxes, insurance, and maintenance.
Feeling more informed?
Now that we’ve debunked the common myths about reverse mortgages, you can stay informed about how they actually work.
If you think this might be a good option for you, reach out to a Movement loan officer near you to get started!
