An FHA-insured HECM reverse mortgage is not perfect for everybody, but it is a great financial tool for the right candidate. Unfortunately, many seniors who could benefit from a reverse mortgage don’t take advantage of one because of the rampant misinformation they hear. Even reputable media outlets and pundits constantly get it wrong about the reverse mortgage.
The following is a list of some of the most common reverse mortgage myths you may have heard:
Myth#1: “I’m giving up ownership of my home.”
Not at all. Again, a reverse mortgage is just a home loan. It’s a home loan designed to give you access to your home equity without a mortgage payment and without giving up ownership of your home. You are not selling your home to the bank when you get a reverse mortgage.
Myth #2: “The reverse mortgage is for broke and desperate people.”
Not at all. In fact, many so-called broke and desperate people don’t even qualify. Many wealthy people get reverse mortgages for a variety of reasons, including supplementing income, increasing liquid assets, and gaining additional financial flexibility. A reverse mortgage is not a loan for broke and desperate people.
Myth #3: “The reverse mortgage will use up all of my equity.”
Not necessarily. It’s true that a reverse mortgage converts equity into cash, which means the loan balance increases over time. However, it’s also designed to preserve equity. The HECM program is not financially viable if it uses up your equity quickly. Remember, a HECM is a non-recourse loan insured by FHA. The FHA insurance fund covers the shortage if there’s not enough value in your home to settle the entire loan balance. The HECM program isn’t financially viable if it uses up equity quickly and results in large numbers of claims against the FHA insurance fund. For the HECM to work long-term, it has to preserve equity at the same time it offers access to equity.
Myth #4: “I’ll be leaving a big debt to my heirs.”
Again, the reverse mortgage is a non-recourse loan insured by FHA. You won’t leave a big mess for your heirs to clean up. Your heirs are not on the hook for the shortage if there’s not enough value in your home to pay off the entire balance.
Myth #5: “Reverse mortgage interest rates are sky high.”
Not at all. In fact, HECM reverse mortgage rates are often very comparable to traditional mortgage rates.
Myth #6: “The fees are really expensive.”
This is sometimes true, but not always true. Lenders often have leeway to cover closing costs – especially if you’re paying off a large mortgage balance. Be sure to ask!
Myth #7: “The bank takes my house when I die.”
Not at all. You are always the owner and you can leave your home to your heirs. If your heirs want to keep the home, they need to either pay off or refinance the reverse mortgage balance. If they don’t want the home, the bank will sell it and pay back the reverse mortgage balance. Any remaining equity goes into your estate.
Myth #8: “I can’t take any long trips or temporarily go into a nursing home or I might lose my house.”
Not at all. It’s true that you need to live in the home, but you are still able to take long trips or live in a nursing home for a few months. Just make sure you live in the home at least part of the year and it remains your primary residence.
Myth #9: “I can’t ever sell my house. I’m stuck in the house for the rest of my life.”
Not at all. The reverse mortgage is best suited for those who don’t plan to sell anytime soon, but you still have the option to sell if you wish. There are no prepayment penalties or limitations on selling.
Myth #10: “As long as I’m 62 and have equity in my home, I qualify for a HECM reverse mortgage.”
Unfortunately, it’s not quite that simple. There’s more to qualifying than having equity and being at least 62. Lenders evaluate income and credit through a process called financial assessment. Your home also needs to be in at least reasonably good condition to qualify. Not everybody who owns a home and is at least 62 qualifies.
Myth #11: “I don’t need it now. I’ll just wait to get a reverse mortgage when I really need it.”
Don’t count on it. It’s actually gotten tougher to get a reverse mortgage over recent years. FHA has tightened the qualifying standards to reduce defaults due to nonpayment of property charges (property taxes, homeowner’s insurance, HOA dues, etc.). Just because a reverse mortgage is available to you today doesn’t mean it will be in the future. Even if qualifying guidelines don’t change, plenty of other factors could make a reverse mortgage less workable or attractive in the future:
- Higher interest rates – A reverse mortgage offers more money when rates are lower. If rates rise, you may not qualify for as much money as you can today.
- Lower property values – Many real estate markets across the country have seen big increases in home values over recent years. If you’re in one of those places, your market could be ripe for a correction. If home values fall, you may not qualify for as much money.
- Deterioration in your credit or financial profile – FHA rolled out new financial assessment guidelines in 2014 that require lenders to take into account your income, expenses, and credit history. If you take on a lot of debt or incur big medical bills, you may have difficulty qualifying.
- Deterioration in the condition of your home – We all know that homes take maintenance over time. If you’re tight financially and can’t keep up with the maintenance of your home, it may be tough to get a reverse mortgage in the future. Your home doesn’t need to be perfect, but it does need to be in at least reasonably decent shape to qualify for a reverse mortgage.
The time to get insurance is not while your home is already burning down. If you qualify today and the reverse mortgage truly helps you, take advantage of it today. There is no guarantee it will be available in the future.
How much can you get from a reverse mortgage?
If you’d like to see how much you can get from a reverse mortgage, check out this great reverse mortgage calculator at our partner site.