Reverse mortgages get quite a bit of coverage from the media—much of it negative, and not without reason. For Retirees, Home Equity can be their largest asset. Accessing that asset in retirement can be a challenge when income is lower. This isn’t new, The Federal Government has tried to assist Retirees in this report for approximately 30 years by providing insurance to protect the borrowers, heirs and lenders.
Regardless, this has been a rocky road because until May 2015 the income and credit weren’t even considered. Can you imagine applying for a mortgage with no verification of income or credit? No surprise this resulted in homes sold in Sheri sales.
So,
in 2015, minimum income and credit requirements were imposed as the solution
which has worked; with little recognition from the media. By adding these
safeguards this newest version of the Home Equity Conversion Mortgage (HECM)
has evolved into a unique loan program for homeowners 62 and older.
(Only one on title needs to be > 62) So, let’s move forward from the past to
the present.
To help separate the myths from the facts, I asked local expert Home Equity Retirement Specialist, Joe Boyd with this discussion.
What’s a reverse mortgage? Simply put, it’s a loan. Unlike most loans, when you take out a reverse mortgage you don’t pay it back month by month; instead, your loan is repaid with the proceeds from the sale of your home sometime in the future.
A homeowner must be at least 62 years old and have a large amount of equity in their home to take out a reverse mortgage. Proceeds from the reverse mortgage can be doled out as a lump sum, in the form of fixed monthly payments or held in reserve as a line of credit.
Many consumers have some misconceptions about what’s involved in taking out a reverse mortgage. Here are four common myths:
Myth #1: The bank receives the title to the home as part of the reverse mortgage.
Reality: False. The homeowner keeps the title of the home in their name.
Myth #2: Your heirs will not inherit your home.
Reality: If you have an outstanding reverse mortgage on your home when you pass, your estate will still inherit your home. At this point, the outstanding loan on the property must be repaid. Importantly, though, a reverse mortgage is a “non-recourse” loan, which limits how much your heirs owe:
- If your heirs decide to keep the home, they will have to pay off the loan. But they can never owe more than the home is worth.
- If the house is sold and the sale doesn’t cover the loan balance, the difference is paid by the Federal Housing Administration (FHA). This means that even if the house sells for less than the loan amount, your heirs won’t owe anything.
- If the property is sold for an amount in excess of the loan balance, the remaining funds go to your heirs.
Myth #3: You will be forced out of your home if you don’t pay back the reverse mortgage.
Reality: A reverse mortgage never needs to be paid back by the borrower as long as it is their permanent residence. If you take out a reverse mortgage, you can remain in the property for the rest of your life without making any payments on the loan. However, you will still owe property taxes and homeowner’s insurance. If those payments are missed, you could face a foreclosure.
Myth #4: A reverse-mortgage line of credit and home-equity line of credit are the same thing.
Reality: While both are methods to tap into the equity of a home, there are some important differences. A home equity loan needs to be repaid, typically over a five- or 10-year period. Reverse mortgage loans do not. But reverse mortgages can come with higher upfront closing costs than home equity loans.
It’s worth repeating that reverse mortgages are an option that can make sense in certain financial situations and can be the wrong choice in others. Be sure to seek expert advice if you have questions about whether a reverse mortgage is right for you or a loved one.
Thank you to Joe Boyd for his help explaining the myths from the facts. Joe can be reached at jboyd@rfslends.com
