Reverse mortgages get quite a bit of coverage from the media—much of it negative, and not without reason. But they can be a useful financial planning tool in certain situations, so let’s separate the myths from the facts.
What’s a reverse mortgage? Simply put, it’s a loan. Unlike most loans, when you take out a reverse mortgage you don’t pay it back month by month; instead, your loan is repaid with the proceeds from the sale of your home sometime in the future.
A homeowner must be at least 62 years old and have a large amount of equityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. in their home to take out a reverse mortgage. Proceeds from the reverse mortgage can be doled out as a lump sum, in the form of fixed monthly payments or held in reserve as a line of credit.
Many consumers have some misconceptions about what’s involved in taking out a reverse mortgage.
Here are four common myths:
Myth #1: The bank receives the title to the home as part of the reverse mortgage.
Reality: False. The homeowner keeps the title of the home in their name.
Myth #2: Your heirs will not inherit your home.
Reality: If you have an outstanding reverse mortgage on your home when you pass, your estate will still inherit your home. At this point, the outstanding loan on the property must be repaid. Importantly, though, a reverse mortgage is a “non-recourse” loan, which limits how much your heirs owe:
- If your heirs decide to keep the home, they will have to pay off the loan. But they can never owe more than the home is worth.
- If the house is sold and the sale doesn’t cover the loan balance, the difference is paid by the Federal Housing Administration (FHA). This means that even if the house sells for less than the loan amount, your heirs won’t owe anything.
- If the property is sold for an amount in excess of the loan balance, the remaining funds go to your heirs.
Myth #3: You will be forced out of your home if you don’t pay back the reverse mortgage.
Reality: A reverse mortgage never needs to be paid back by the borrower. If you take out a reverse mortgage, you can remain in the property for the rest of your life without making any payments on the loan. However, you will still owe property taxes and homeowner’s insurance. If those payments are missed, you could face a foreclosure.
Myth #4: A reverse-mortgage line of credit and home-equity line of credit are the same thing.
Reality: While both are methods to tap into the equity of a home, there are some important differences. A home equity loan needs to be repaid, typically over a five- or 10-year period. Reverse mortgage loans do not. But reverse mortgages come with much steeper upfront closing costs than home equity loans.
It’s worth repeating that reverse mortgages are an option that can make sense in certain financial situations and can be the wrong choice in others. We’re always happy to help you think it through. Please contact us at (800) 492-6868 if you have any questions about whether a reverse mortgage is right for you or a loved one.