Reverse mortgages garner quite a bit of attention from the media—much of it negative. And that’s appropriate. But it’s not the whole story. Reverse mortgages can be a useful tool in certain situations, so let’s separate the myths from the facts.
What is a reverse mortgage? Simply put, it’s a loan against the value of your home. But unlike most loans, when you take out a reverse mortgage, you don’t pay it back month by month; instead, your loan is eventually repaid with the proceeds from the sale of your home or by your estate sometime in the future.
A homeowner must be at least 62 years of age 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 (50% is a good rule of thumb, but the amount of equity required depends on the lender, the size of the mortgage balance and the value of the home). Proceeds from a reverse mortgage can be taken as a lump sum, doled out in the form of fixed monthly payments or held in reserve as a line of credit.
Misconceptions about what’s involved in taking out a reverse mortgage are common. For instance:
Myth #1: The bank receives the title to the home as part of the reverse mortgage.
Reality: The title stays in the homeowner’s 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 foreclosure.
Myth #4: A reverse-mortgage line of credit and home-equity line of credit are the same thing.
Reality: While both can be used 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 closing costs than home equity loans.
It’s worth repeating that reverse mortgages are an option that makes sense in certain financial situations and can be the wrong choice in others. We recommend calling your Adviser Investments wealth management team if you have questions about whether a reverse mortgage is right for you or a loved one.
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