To say that the reverse mortgage is misunderstood is an understatement. The American College of Financial Services polled 1,000 people between the ages of 55 and 75 with at least $100,000 in investable assets and $100,000 in home equity. Survey respondents were asked 10 questions on how a reverse mortgage works, but only 30 percent of the participants earned a passing grade on the basic knowledge about reverse mortgages, while 10 percent of respondents gave incorrect answers to every question on the topic.
If this poll is a good cross-section of senior homeowners across America, 7 out of 10 people do not
even understand the basics of a reverse mortgage and how they work. This would explain why, out of all eligible borrowers, only 3.65% have an active reverse mortgage.
I chalk it up to human nature.We can be stubborn and cling to our beliefs. Our caveman brain makes us fearful of the unknown. And to top it all off, we have terrific coping skills when dealing with tough situations.
Most of the time people come into my office reluctantly, usually due to some sort of financial pain they are experiencing. They have exhausted every other avenue and are only seeing me because they view the reverse mortgage as their last resort.
It is pretty obvious when they sit down in front of me that they are skeptical about the reverse mortgage. They are closed off, look scared and appear uncomfortable.
Our conversations usually start out with me asking them what they know about reverse mortgages. Typically they don’t know much and more often than not, the things they tell me are all wrong.
After I explain how it works, including the protections that are in place, how it could be used in their situation and how it solves most, or all of their problems, they usually say something like, “It sounds too good to be true,” or, “Why didn’t we do this sooner?”
There are many myths,misunderstandings, misconceptions and thoughts that keep people from getting or even exploring, a reverse mortgage.
The Most Common Reverse Mortgage Myths
Myth that the Bank Owns Your Home
A lot of people think that the bank owns the home if they do a reverse mortgage. This is not true. When you get a reverse mortgage, there is a lien placed against the property to secure the loan. This happens with any type of mortgage because the proceeds of the loan need to be secured with an asset. In a reverse mortgage, you do not sign the title of the property over to the lender and the bank doesn’t own your home.
Myth that the Bank/Government Gets Your Home When You Die
The government does not get your
home when you pass away, and they don’t want it. A reverse mortgage is not a government benefit, nor is the government lending you money. When you pass away, your home goes to the estate. The estate then decides what to do with the property. This is the same as with a traditional mortgage, or if it was owned free and clear.
Myth that Heirs Cannot Inherit the Home
This is the same as above. When you pass away, your home goes to the estate. The estate then decides what to do with the property. If there is no equity left in the home after you die, then there is nothing for them to inherit. However, they still have several options, which we will cover later in the site.
Myth that the Bank Can Take the Home at Any Time
As long as you are following the terms of your loan agreement, the bank can never take your home. The basic terms you need to follow include that you pay your property taxes, homeowner’s insurance, flood insurance (if applicable), HOA dues (if applicable) and maintain your home. The home also needs to be your principal residence. If you do not live in the home for 12 consecutive months, the loan becomes due in full.
Myth that You Can Outlive a Reverse Mortgage
Forward, or regular mortgages have a payback term which varies, but the most common terms are a 15-year or 30-year loan. The term with a reverse mortgage is 80 years. In other words, unless there is some medical miracle, you will not outlive a reverse mortgage. What you need to be aware of is that you could
outlive the proceeds from a reverse mortgage. This, of course, is determined by your spending habits and monetary needs. The one exception to this is if you choose the tenure loan option, which guarantees a monthly payment to you for as long as you live in the home.
Myth that Your Heirs Get Stuck with a Big Bill
This is a non-recourse loan which means the lender cannot pursue you, your estate or your heirs for any losses associated with this loan.
Myth that You Could Owe More Than the Home is Worth
Technically the loan balance could exceed the value of the home at some point in the future. However, you can never owe more than 95% of the appraised value of the home.
Myth that Social Security or Medicare Could Be Affected
Social Security and Medicare will not be affected by a reverse mortgage. Medicaid,
however, could be affected. It is best to speak with your financial advisor or social worker to find out if any of the assistance programs you are utilizing will be affected using a reverse mortgage.
Myth that the Home Needs to Be Owned Free and Clear to Qualify
You do not need to own your home free and clear to get a reverse mortgage. All liens will need to be paid off through the proceeds of the reverse mortgage. A very common reason to get a reverse mortgage is to get rid of monthly mortgage payments.
Myth that I Must Pay Taxes on the Funds I Receive
The proceeds from a reverse mortgage are considered a loan, and therefore are not taxable. Reverse
mortgages are often advertised as “tax free” and people often misinterpret this to mean that they do not have to pay property taxes. You are still required to pay property taxes and insurance.
Myth that You Must be 62 to Qualify
All borrowers need to be 62 to qualify for a reverse mortgage. While spouses under 62 are not eligible as borrowers, they can be considered “non-borrowing spouses.” This can provide protection for them should they survive the eligible borrower. Eligible non-borrowing spouses under the age of 62, at the time of application, are allowed to defer the sale of the home and remain in the home if certain requirements are met.
Myth that My Kids Wouldn’t Want Me to Do This
I have found that most children are very supportive of their parent’s decision to get a reverse
mortgage once you talk with them about your situation, your budget and your needs.