Reverse mortgages are very misunderstood mortgage programs. In part, this is due to myths or misconceptions about this very useful program. Many of the myths about Reverse Mortgages are so entrenched with the public that it is very difficult for them to have a change of mind or heart. This is the case even though there is plenty of evidence that clears up these misconceptions.
We are going to review the top seven myths and give you some information that may help you make a better-informed decision about these programs.
Myth #1 – It’s a scam!
Many people you talk to that are not familiar with Reverse Mortgages will simply and dismissively just say: “Oh, they are a scam!”. And the conversation ends there, no fact-checking no finding out why they think it’s a scam. This often happens if the comment is coming from someone you consider trustworthy. They may have good intentions but they know nothing about these programs.
Truth: These mortgage programs are highly regulated and government-approved. The mortgage industry overall has a significant amount of oversight and it is practically impossible for a mortgage company to blatantly abuse the industry to scam borrowers.
Additionally, the vast majority of Reverse Mortgages are insured by The Department Of Housing and Urban Development (HUD). The government is very involved in making sure seniors are given the proper guidance when they seek to take out a reverse mortgage.
Prospective borrowers are even required to take formal counseling from HUD-approved intermediaries to ensure borrowers can be fully informed of their rights and obligations.
Myth #2 – The bank will own your house
This is yet another baseless claim that is made about Reverse Mortgages. This is probably one of the most pernicious falsehoods about these products. This probably comes from decades-old information about someone having their home repossessed by the bank for legitimate reasons.
Truth: The bank only holds a mortgage or deed of trust, just like on any other type of mortgage. If you have ever taken out a loan against your home, this is the same thing.
As a borrower, you do have some conditions you have to meet in order for the bank’s interest to be protected. Those conditions are clearly spelled out on the loan documents. In some cases, borrowers default on those requirements, and the bank will foreclose. Same as it is on any other mortgage. Before that happens though, HUD gets involved to protect the homeowner’s interests and every attempt is made to help the homeowner keep their home.
Myth #3 – I won’t be able to leave my home to my kids
This widely spread misinformation is usually propagated by sons and daughters of senior citizens. They are afraid that their inheritance will be in jeopardy. Sadly, they rarely think about the needs of their parents which causes them to seek a reverse mortgage.
Truth: The house can be willed to the heirs. If there is no will, the usual estate settlement will take place just like with any other property that has a mortgage. The heirs are given plenty of time to either pay off the mortgage that the parents took out or sell the property as is their right.
Myth #4 – I won’t be able to sell my house
This is another completely inaccurate statement. If pressed for a source of where that information comes from, nobody has an answer. It is, of course, a myth.
Truth: A homeowner who has taken out a reverse mortgage has no restrictions from the mortgage company to sell their home. The only thing the seller would have to do is pay off the loan, just like with any other mortgage.
Myth #5 – My heirs will have to repay the loan
The assumption here is that people think the heirs will have to keep making payments on the loan once the last parent is deceased. Or, the heirs may need to repay the loan if there is a deficiency when the house sells and the amount owed is larger than the proceeds of the sale.
Truth – That is not the case at all. Once the last surviving homeowner is deceased, the bank gives the heirs 6 months to a year to settle the estate and pay off the mortgage. The heirs are under no obligation to make any payments at all.
If the house sells for less than the amount of the mortgage (highly unlikely to happen), by law the bank will satisfy the obligation with the proceeds. These are non-recourse mortgages so the bank can’t collect anymore.
Any excess proceeds that come out of the sale of the house is dispositioned according to the estate settlement rules. Normally the heirs get the money unless there is a will or other provision stating otherwise. The bank has no control over this.
Myth #6 – I can’t qualify because my house is not paid off
This misconception is mostly due to a lack of information. It is usually believed by the homeowner themselves without really seeking out information.
Truth: The fact that there is a mortgage on the house does not prevent a homeowner from getting a reverse mortgage. In fact, that is the very reason many seniors seek out a reverse mortgage; they don’t have the cash flow to continue making the current mortgage payments.
They may also decide that they would rather put those funds to better use.
Oftentimes seniors want to live out their golden years enjoying all the things they planned to do. Not having a mortgage payment gives them that freedom.
Myth #7 – You are afraid your spouse may get kicked out of the house once you are gone
This is a noble and valid concern that does need to be clarified. Although there may have been the potential for this to happen in the past, the loan program was not designed to do that.
Truth: Reverse mortgages were very clear on the rules and requirements. Prior to Aug 2014, that was a possibility that a surviving spouse may not have been protected by the rights afforded by the Reverse Mortgage program. This was not however a fault of the program but rather a lack of understanding by the homeowner.
What would happen is a homeowner would take out a reverse mortgage while they were single, then get married. What they did not do is think about the ramifications of that based on the reverse mortgage terms. In limited cases, the spouse would get forced out due to poor planning by the couple.
Conclusion
Reverse mortgages are programs that serve a legitimate purpose and fill a need for many senior citizens. These loan programs are still not mainstream and therefore there is a lot of misinformation about them.
Reverse mortgages offer some great benefits to seniors who want to make use of the equity of their homes. The most common use is to supplement retirement income. As seniors’ needs grow and the income is just not there during retirement, this is a great way to live the lifestyle they deserve.
Decades of working hard to pay off that mortgage and not contributing to a retirement plan can be a hardship in retirement. Using a reverse mortgage can provide that extra retirement income that is much needed by many.