Reverse Mortgage Misconceptions
"The bank will own my home."
Considered to be the number one misconception associated with reverse mortgages by Peter Bell of the National Reverse Mortgage Lenders Association (NRMLA), as well as several members within the industry, this belief is 100% false. Just like a traditional forward mortgage, reverse mortgage customers will retain the title to their home for as long as they occupy the residence.
"The costs of a reverse mortgage outweighs the benefits."
In comparison with other options, a reverse mortgage can actually be less costly to pursue. Reverse mortgages can be more expensive than traditional mortgages in terms of total cost over the life of the loan; however, it is far less expensive in terms of out-of-pocket costs, such as monthly mortgage payments. When compared with selling your home, an FHA reverse mortgage is not only less costly in terms of out-of-pocket costs, but also in terms of total cost over the life of the loan.
"Only desperate people need reverse mortgages."
Reverse mortgages are utilized by individuals from all walks of life. The reasons behind obtaining a reverse mortgage are as widely varied as the individuals seeking them. Reverse mortgage funds can be used to fund a vacation, purchase a new car, send a grandchild to college, or pursue a new hobby, as well as to cover medical expenses, pay off credit card debt, or provide funds for daily expenses. While the need for a reverse mortgage may be greater for some than others, the growing utilization of this program makes evident the fact that it provides tremendous benefits to seniors in a wide array of applications.
"I can end up owing the bank more than my home is worth."
With a federally insured reverse mortgage, you will not be obligated to compensate the lender for any amount in excess of the market value of your home. Any balance owed that is above the home's market value when the loan becomes due will be reimbursed to the lender through the FHA insurance fund. However, if maintenance, property taxes and home owner's insurance are not kept up, the lender can call for the note to be paid in full, regardless of the home's value.
"When a reverse mortgage becomes due, the lender sells the home."
When you no longer live in the home, the reverse mortgage becomes due. Whether the funds used to repay the reverse mortgage are obtained by selling the home, refinancing the home or by some other method is up to you or your estate. If the home is sold, any amount left after what is owed on the reverse mortgage belongs to yourself or your estate.
"I will lose my Social Security or Medicare benefits if I obtain a reverse mortgage."
Because the funds received from this type of financing are not considered income, they will not affect entitlement-based government benefits, such as Medicare or Social Security. However, there may be an impact upon need-based benefits, such as Supplemental Social Security Income or Medicaid. Be certain to check with your caseworker if you receive government benefits to ensure your income will not be affected.
"I will no longer have an estate to leave my heirs."
Since you always retain title to your home, any equity remaining in your home can be passed on to your heirs. While FHA reverse mortgages are intentionally structured to preserve equity, our loan specialists can help you in creating strategies to maximize the amount of equity you are able to retain.
"I must own my home free and clear to obtain a reverse mortgage."
Even if you have an outstanding first mortgage on your home, you may qualify for an FHA reverse mortgage as long as you have substantial equity. The current mortgage will have to be paid off either out-of-pocket or with the reverse mortgage.
"The bank has to approve how I use the money."
This is completely false. There are absolutely no restrictions on how you use your reverser mortgage proceeds and your lender will never ask for an accounting of your funds.
"I have to pay income taxes on the money I receive."
Because the funds that you receive are the proceeds of a loan, rather than earned income, you will not be required to pay any income taxes on what you receive.
"The lender can kick me out of my home."
Since you continue to hold title to your home, the lender cannot force you to vacate your residence. Under the terms of the reverse mortgage agreement, the loan can only become due prior to your voluntarily leaving the home if you fail to keep repairs, insurance and taxes current. If this happens and you are not able to repay the loan by refinancing the mortgage, you may have to sell the home.
"My surviving spouse will have to pay back the loan when I pass."
So long as your spouse is also listed on the reverse mortgage, repayment will not be necessary upon your passing. If your spouse currently does not meet minimum age requirements, you have the option of adding them to the note upon their 62nd birthday using an FHA reverse mortgage to FHA reverse mortgage refinance. Another option is to purchase a life insurance policy that will repay the mortgage in the event that the borrower passes away before their spouse is eligible. (Note: it is generally recommended that any purchase of financial or insurance products be a separate transaction than that of your reverse mortgage.)
