Myths & Misconceptions of Reverse Mortgages
Myth #1: I changed the title to my property to my children’s names and I have a Life Estate, so I’m not able to obtain a Reverse Mortgage.
- FACT: As long as the house is occupied by the beneficiary of the Life Estate (or Family Trust) as their primary residence, the title can remain the same and you could be eligible for a Reverse Mortgage.
Myth #2: If I take out a Reverse Mortgage, the bank will own my home.
- FACT: As with any mortgage, the title will remain in your name. The bank will place a lien on the property so that when the house is sold or refinanced, the balance owed is paid off and the lien is released. If the balance exceeds the appraised value when the house is sold, the amount that exceeds the value is forgiven.
Myth #3: My spouse just turned 59 years old so we can’t qualify for a Reverse Mortgage for three more years.
- FACT: As long as at least one borrower is 62 or older, a couple can obtain the Federally Insured Home Equity Conversion Mortgage (HECM), but the lowest age is used in the calculations to determine the amount of equity you will have access to.
Myth #4: If one of us has to go into Long-Term Care, my spouse will lose the house.
- FACT: If one of the parties needs to go into a Long-Term Care facility, the Reverse Mortgage will continue for the remaining homeowner. Once both homeowners are out of the home for a year, the Reverse Mortgage loan becomes due and payable.
Myth #5: My house needs some repairs so I can’t apply for a Reverse Mortgage until the repairs are completed.
- FACT: Provided the repairs are less than 15% of the home value and are not health and safety issues, written estimates from licensed contractors for the needed repairs will allow the loan to close with 150% of that amount held in escrow.
Myth #6: I won’t have anything left to leave to my children/grandchildren if I take out a Reverse Mortgage.
- FACT: If the purpose of a Reverse Mortgage is to allow the homeowner(s) to stay in their residence and age in place, there are multiple options that allow the homeowner(s) to tailor the program to best fit their needs. How much money they receive is based on the age of the youngest borrower. The amount owed at the end will depend on how long the loan is in place, the amount that was taken out during the time it was in place, and the interest rate. The program is designed to take care of the homeowner’s financial needs, but in most cases, there is equity left over at the end for the estate or heirs.
Myth #7: The bank can foreclose, and I can lose my house and all my equity.
- FACT: The only reasons the bank can foreclose on a Reverse Mortgage are for non-payment of the Real Estate Taxes, Homeowner’s Insurance or not maintaining the home so it holds its value. If you do get into a financial bind that limits your ability to meet these three obligations, you can sell the home for the market value and pay off the Reverse Mortgage.
Myth #8: I want to sell my two-story house and buy one that is all on one level, but I am concerned I will not receive enough money from the proceeds to buy the house I really want without having mortgage payments.
- FACT: If the home you want to buy costs more than the money you will receive from the proceeds of the sale of your current home, you can use a Reverse Mortgage to cover the shortfall and have no required monthly mortgage payments.
Myth #9: My house is worth so much more than the available equity I can use, according to my lender.
- FACT: In order to preserve enough equity to absorb the interest and fees associated with the money you owe through your life expectancy; the bank must limit the portion of the equity that is available to withdraw. How much money you receive is based on actuarial tables.
Myth #10: My elderly relative needs in-home care, but the costs so far are depleting her investments during a down market. If she takes out a Reverse Mortgage while her property value is near its peak, will the equity available at closing decrease if the property value goes down?
- FACT: The equity available is based on the appraised value and the only limiting factor on how much is available as each month passes is how much money they use. If they leave funds in the Line of Credit feature, that will grow each month giving them the availability of more funds. The LOC rate is ½ a percent higher than the interest being charged on the loan.
Myth #11: If I draw funds from a Reverse Mortgage to help supplement my income, it can disqualify me from receiving fuel assistance and other programs that use the income to determine qualification.
- FACT: The “income” you receive from a Reverse Mortgage is considered a loan and not counted as income for these programs. However, every program has its own criteria, so it’s best to ask questions of the agency that sponsors the programs. Be sure to ask if they have any limitations on the amount of money you have in your bank accounts month to month (Medicaid has a limit and looks at the last 5 years).
Myth #12: Once I start the application, I’m obligated to close, even if my circumstances change and I no longer need a Reverse Mortgage.
- FACT: Throughout the process, you are given several opportunities to withdraw your application. We start with the Reverse Mortgage Counseling before the application is started. During the process, you will receive a Loan Estimate at the start, another when the appraisal is received, and a third when we are near closing. Each of these requires a signature to continue. Finally, you receive the Closing Disclosure, then sign the closing documents. As with any refinance, you have three business days to rescind (cancel) the transaction.
Myth #13: The fees on a Reverse Mortgage are too high.
- FACT: While this statement is technically true, they really aren’t much different from an FHA loan used to purchase or refinance a property. However, they are financed into the loan balance and if you see how the higher costs are offset by the benefits of not having required monthly mortgage payments, adding income, or having equity available to use for repairs or doing things you thought you couldn’t afford, the fees included with a Reverse Mortgage don’t seem as significant.
Myth #14: My spouse passed away and without his/her income, I don’t think I can afford to remain in our home…
- FACT: A Reverse Mortgage can be used as a source of monthly income for as long as the remaining spouse lives in the home as their primary residence. There will be no required monthly mortgage payments and since the income received is from a loan, it should not count as income when applying for fuel assistance, Real Estate Tax reduction, food stamps, etc. Payments can be made on a Reverse Mortgage, but payments are never required.
Myth #15: We have adequate monthly income and our mortgage is paid off. There’s really no reason for us to take out a Reverse Mortgage
- FACT: A Reverse Mortgage can provide a line of credit to help you prepare when you need extra cash. Whether it be to keep up with home maintenance and repairs or health issues arise. You may never have to use having the peace of mind knowing you have immediate access to the equity in your home without required monthly payments can simplify the process when the need arises.
Contact Milly today with any questions or for a personal review of your options.
Mortgage Loan Originator, NMLS #29841