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Debunking Reverse Mortgage Myths

By on September 18, 2014 in Mortgage Programs

Reverse Mortgages are one of the most misunderstood loan programs that the government insures. Even though there are a number of benefits for seniors through a HECM reverse loan, many eligible homeowners are missing out due to the overwhelming myths about the nature of reverse mortgages.

While a reverse mortgage is not the only way seniors can save money on their housing costs and protect themselves against future real estate market crashes, there are still an average of 70,000 reverse mortgages originated each year according to a report to Congress by the Consumer Financial Protection Bureau.

There are all sorts of reviews that you can find online, including bad ones. Everyone is certainly entitled to their own opinions according to our First Amendment rights. Unfortunately, the opinion of others can create second thoughts in those who may be interested in a reverse mortgage. Here is a quick overview on the reverse mortgage loan followed by a couple of myths backed up by facts.

Unlike many mortgage programs that are insured by the Federal Housing Administration, the guidelines for FHA HECM Reverse Mortgages are clear and easy to understand. However, if you should have any other questions in regards to how reverse can benefit you, it is best to speak with a lender and counselor to determine if this program is the best for your scenario.

Overview of Reverse Mortgage Loans

A reverse mortgage is a unique home loan for homeowners who are 62 years or older that requires no monthly mortgage payments. However, borrowers are still responsible for property taxes and homeowner’s insurance.

Reverse mortgages allow seniors to access the equity they have built up in their homes now, and defer payment of the loan until they die, sell, or move out of the home.

Because there are no required mortgage payments on a reverse mortgage, the interest is added to the loan balance each month. The borrower (or the borrower’s estate) is generally not required to repay any additional loan balance in excess of the value of the home.

Still unsure if reverse is right for you? Mortgage Home Base has several reverse mortgage loan professionals that may be able to help you determine whether or not a reverse mortgage loan would be beneficial to your scenario.

Reverse Borrower Requirements and Responsibilities

Age to Qualify: 62 years or older
Primary Lien: This is a single loan, and all second mortgages or home equity lines of credit would have to be paid through the refinance.
Occupancy Requirements: Vacation homes and investment properties are not eligible, only the primary residence that is in collateral with the reverse loan can qualify.
Responsibilities: Property taxes and homeowners insurance must be current along with other mandatory obligations associated with the property. The property must also be kept in good condition including making mandatory repairs while under a reverse.

A Reverse Mortgage allows for its borrowers to always retain the title or ownership of their home. The lender does not own your home even after the last surviving spouse permanently vacates the property.

Reverse Mortgage Myths and Facts

There are many common myths surrounding reverse mortgages of what they can and cannot do for its borrowers.

Myth Debunked: Reverse Mortgages are too expensive

Taking out any type of mortgage loan can be expensive. For those who own homes, you know that the purchase of a mortgage comes with:

  • Origination fees
  • Third-party closing charges (e.g. appraisal, title search, recording costs)
  • Service fees

You can include most of these costs in a reverse mortgage loan. For those who choose to go with a traditional HECM Standard Reverse Mortgage they are required to pay a good amount of FHA’s Upfront Mortgage Insurance Premium which can sometimes be as much as 2% of the value of their home. The good news is, this insurance guarantees that you will receive the loan payments that you are expecting.

There is a now a new Saver HECM Reverse Mortgage is less costly, it eliminates all but the upfront mortgage insurance fee. Because of the difference in costs, the loan amount may be less than a that of a HECM Standard loan.

Myth Debunked: A Reverse Mortgage will make you ineligible for government benefits.

Don’t worry, this does not change your rights to having SS (Social Security) or Medicare. However, for certain need-based programs, it may have some impact if the reverse mortgage proceeds are used for anything beyond your monthly expenses. Professional Reverse Lenders can answer your questions in regards to what programs may be affected.

Myth Debunked: Under the terms of a Reverse Mortgage, the lender now owns your property.

This is one of the most common misconception of reverse mortgages that prevents many potential borrowers today from looking further into the program. When in fact, a reverse mortgage loan is similar to that of a Conventional loan where the borrower keeps the title of their home and at no point while the loan is outstanding should a lender have that entitlement.

Myth Debunked: I will be living in debt if I take out a Reverse Mortgage.

If you really think about it, a house is a dead investment. You are not able to make any type of money in your home until you sell and receive the difference between what you owe on a mortgage, less real estate / closing costs, and the sales contract price. With reverse mortgages you are simply converting the equity in your home into upfront cash or a monthly payout.

Myth Debunked: The lender is going to sell my home when my reverse mortgage loan is due.

The loan would only become due if you no longer live in the home. If the borrower does pass away, then their heirs will be responsible for the loan. The loan payment can be paid off by refinancing or selling off other assets that the borrower has left behind. They can also sell the home and use any proceeds from the sale to pay off the mortgage.

The primary benefit here is that if the property value is less than the amount owed on the mortgage, the FHA Insurance will cover the difference in deficit. This should give children of reverse mortgage borrowers peace-of-mind knowing that they’ll never owe more than the property was worth.

Myth Debunked: My heirs might be stuck with a large bill if the value of my home decreases.

Reverse mortgages are non-recourse loans and you are not obligated to pay back more than the market value of your home when it is sold. However, a default in your loan due to non-payment of your property taxes or other obligated fees, just like other mortgages will result in the borrower owing the full balance, even if it is more than the market value of the home.

Myth Debunked: I will be restricted in how I use the money i get from a Reverse Mortgage.

The money is yours and you are able to use this money freely. Many of reverse mortgage borrowers are able to make home improvements with the extra income coming in from a reverse mortgage. Pay off their medical bills, pay off all credit card debts, pay for in-home healthcare, purchase a new car, travel, help set up college funds for their grandchildren.

Are you still finding it hard to believe that such a loan can give out all these benefits? The only way to truly find out is by speaking with a reverse mortgage lender today, free of any obligations!

Being able to eliminate all financial burdens that weigh down on our everyday lives is an amazing feeling. That is why it is so important to do a thorough research in finding out all the facts before going with what we read everyday that may have us missing out on benefits that we can actually use.

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About the Author

About the Author: Jessica Lucas is the managing editor for Mortgage Home Base, a top real estate finance blog dedicated to helping borrowers and home buyers understand the home loan process. Follow Jessica on Google +, and share your comments here. .
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