Myths of Reverse Mortgages
There are 8 common myths about reverse mortgages:
- A reverse mortgage sells the home to the lender
- Heirs will not inherit the home
- The homeowner could get forced out of the home
- You could outlive the reverse mortgage
- Social Security and Medicare will be affected
- The homeowner pays taxes on reverse mortgage proceeds
- There are large out-of-pocket expenses
- A reverse mortgage is similar to a home equity loan
1. A reverse mortgage sells the home to the bank
Lenders are not in the business of owning homes — they wish to make loans and earn interest. The homeowner keeps the title to the home in their name. What the lender does is add a lien onto the title so that the lender can guarantee that it will eventually get paid back the money it lends.
2. Heirs will not inherit the home
The estate inherits the home as usual, but there will be a lien on the title for the amount of the reverse mortgage loan plus any accrued interest and mortgage insurance premium.
For example, let’s assume someoneone takes out a reverse mortgage and owes $50,000 after 5 years. Then the homeowner passes away and the estate sells the house for $250,000. The lender gets $50,000 and the estate inherits $200,000.
A reverse mortgage is a “non-recourse” loan which means that the HECM borrower (or his or her estate) will never owe more than the loan balance or value of the property, whichever is less; and no assets other than the home must be used to repay the debt. Non-recourse means simply that if the borrower (or estate) does not pay the balance when due, the mortgagee’s remedy is limited to foreclosure and the borrower will not be personally liable for any deficiency resulting from the foreclosure.
3. The homeowner could get forced out of the home
The HECM reverse mortgage was created specifically to allow seniors to live in their home for the rest of their lives. The homeowner will not be evicted or foreclosed on as long as the borrower meets the obligations of the loan. For example, the borrower must live in the home as their primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements. Failure to meet these requirements can trigger a loan default that results in foreclosure.
4. Someone can outlive a reverse mortgage
The reverse mortgage becomes due when all homeowners have moved out of the property for 12 consecutive months or passed away.
5. Social Security and Medicare will be affected
Government entitlement programs such as Social Security and Medicare are usually not affected by a reverse mortgage. However, need-based programs such as Medicaid can be affected. It’s best to consult with a qualified financial advisor to learn how a reverse mortgage could impact eligibility of some government benefits.
6. The homeowner pays taxes on a reverse mortgage
The proceeds from a reverse mortgage are not taxed as income or otherwise (though you must continue to pay required property taxes). Consult a tax advisor for more information.
7. There are large out-of-pocket expenses
Typically, the majority of lender closing costs and fees can be financed into the reverse mortgage loan.
8. A reverse mortgage is similar to a home equity loan
A reverse mortgage and a home equity loan both use the home’s equity as collateral; however, there are also some differences. For example,
- Any homeowner can apply for a home equity loan. A homeowner must be at least age 62 to be eligible for a reverse mortgage.
- A home equity loan typically must be repaid in monthly payments over 5 or 10 years. A reverse mortgage is typically not paid back until the homeowner moves out of the property for 12 consecutive months or passes away.
- A home equity loan that charges no closing costs may have a higher interest rate over the life of the loan. A reverse mortgage charges upfront closing costs but generally has lower interest over the course of the loan.