5 Reverse Mortgage Myths
The reverse mortgage is formally known as the Home Equity Conversion Mortgage (HECM–pronounced “heck´um”), can help retirees improve their cash flow and lengthen their portfolio longevity. It is a safe and common among retired homeowners. But even with its growing popularity, there are still many misconceptions. Let us help you understand how a reverse mortgage really works so you can decide if it is right for you.
1. Reverse mortgages should be a loan of last resort.
Reverse mortgages are another tool in your financial arsenal when you need cash. Why not consider a reverse mortgage instead of driving up your debt using credit cards, asking family for a loan, or selling your paid-off home for cash?
If you are retired and still pay on your mortgage, a reverse mortgage will eliminate those monthly mortgage payments. Ownership does not change with a reverse mortgage and you still own your home if you get one. It is important to remember that as the owner of your home, you are still responsible for paying property taxes, homeowners insurance, and home maintenance costs.
2. You could lose your home to the bank.
You remain the homeowner with a reverse mortgage. You keep the title to your home in your name. Your lender in a reverse mortgage adds a lien onto the title so that the lender will get paid back the money it lends when your home is eventually sold or distributed as part of your estate.
3. Reverse mortgages are expensive.
Unlike the traditional mortgage, a reverse mortgage does have something called the Mortgage Insurance Premium (MIP). The MIP insures your loan and allows you more flexibility to access equity with a non-recourse loan. A non-recourse loan means that the you will never owe more than the loan balance or value of the property, whichever is less. No assets other than the home can be used to pay the reverse mortgage. You will not be personally liable for any deficiency owed under the reverse mortgage.
For example, you take out a reverse mortgage and owe $450,000 after 15 years. At that time, you can sell the house for only $425,000. Your lender gets the $425,000 and you do not owe for remaining $25,000.
Further, if the lender of your reverse mortgage becomes insolvent or fails to make any payments to you under the reverse mortgage, the MIP ensures that you will continue to receive the payments due under the reverse mortgage. The MIP may be expensive but it is a guarantee that your reverse mortgage will not fail you in any way. The MIP is your peace of mind.
4. Your Social Security and Medicare would be affected.
Social Security and Medicare are usually not affected by a reverse mortgage as those benefits accrued when you were working. However, if you are on Medicaid, you may become ineligible. If you are on Medicaid or some other needs-based government program, you should consult with a qualified advisor to learn how a reverse mortgage could impact your eligibility of your government benefits.
5. Your heirs will not inherit the home.
Since you keep the title to your home with a reverse mortgage, you keep your home and then it becomes part of your estate upon your passing. The only difference with a reverse mortgage is that there is a lien on your home. If your estate sells your home, your lender is paid at that time. If your heirs keep your home, your estate or heirs do have to pay off the lien on the title for the amount of the reverse mortgage loan plus any accrued interest and mortgage insurance premium.
As you can see, a reverse mortgage is simply another avenue for you to explore when maximizing your cash flow or minimizing your debt. A reverse mortgage may look tricky but in reality is a trick up a financially savvy retiree’s sleeve.
