Reverse mortgages are available exclusively to homeowners age 55 and older and have evolved from a needs-based product to a product many financial planners recommend as an important component of a comprehensive retirement plan. Below, the myths are separated from the facts.
What is a Reverse Mortgage?
9 Myths About Reverse Mortgages
Myth #1: The bank owns the home. Fact: The homeowner always maintains title ownership and control of their home, and they have the freedom to decide when and if they’d like to move or sell.
Myth #2: A reverse mortgage is a solution of last resort. Fact: Many financial professionals recommend a reverse mortgage because it’s a great way to provide financial flexibility. Since it’s tax-free money, it allows retirement savings to last longer.
Myth #3: Those with a reverse mortgage will owe more than their house is worth. Fact: The conservative lending practices of a reverse mortgage allow clients to take a maximum of 50% (33% on average) of the home’s appraised value. In fact, 99% of Reverse Mortgage clients have equity remaining in the home when the loan is repaid.
Myth #4: A Home Equity Line of Credit (HELOC) is a better option. Fact: HELOCs are a good short-term borrowing option for people who can pay the interest and loan in the near future. However, HELOCs are callable loans and there exists significant risk of non-renewal or cancellation. In comparison, a reverse mortgage is a long-term financial solution that won’t be called based on economic changes such as interest rates increasing, property values decreasing, or a change in the homeowner’s income. Also, money from a reverse mortgage provides the ability to prolong retirement savings.
Myth #5: Reverse Mortgages are too expensive because the rates are high. Fact: Reverse Mortgage rates are modestly higher than regular mortgages because there are no payments required. Reverse Mortgage rates are as low as prime +1.25%.
Myth #6: A steady income or good credit is required to be approved for a reverse mortgage. Fact: Credit score or income verification is “not” required to qualify for a reverse mortgage. The amount of money the homeowner is eligible for is based on their age, spouse’s age, location of the home, type of home, and the home’s appraised value.
Myth #7: The bank can force the homeowner to sell or foreclose at any time. Fact: A reverse mortgage is a lifetime product, and as long as property taxes and insurance are in good standing, the property remains in good condition, and the homeowner is living in the home, the loan won’t be called even if the house decreases in value. Reverse mortgages provide peace-of-mind that the homeowner can stay in their home as long as they’d like.
Myth #8: The homeowner cannot get a reverse mortgage if they have an existing mortgage or secured line of credit. Fact: Many of our clients use a reverse mortgage to pay off their existing mortgage or secured line of credit and debts, freeing up cash flow for other things.
Myth #9: Surviving spouses are stuck paying the reverse mortgage after the other spouse (homeowner) passes away. Fact: Nothing changes for the surviving spouse. The surviving spouse maintains title ownership and control of the home, and has the freedom to decide when to move or sell. No payment is required unless they choose to sell the home.