Reverse Mortgages—Myth Versus Reality

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 titleA document demonstrating legal ownership of property or assets. 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.

About Adviser Investments

Adviser is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process., institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.