Reverse Mortgages—Myths Versus Reality

Reverse mortgages garner quite a bit of attention from the media—much of it negative. But that’s not the whole story. We’re going to separate the myths from the facts.

First, let’s define our terms: A reverse mortgage is a loan that allows you to access a portion of the equity in your home. But unlike most loans, you don’t pay it back month by month. Instead, your loan is repaid down the road, with proceeds from the sale of your home or by your estate.

You must be at least 62 years of age and have a large amount of equity in your home to take out a reverse mortgage (50% is a good rule of thumb, but that amount can vary depending on the lender, the mortgage balance and the value of the home). Proceeds 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.

Myth: The bank receives the title of the home as part of the reverse mortgage.
Reality: The title stays in the homeowner’s name.

Myth: 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).
• If the property is sold for an amount in excess of the loan balance, the remaining funds go to your heirs. 

Myth: 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 still owe property taxes and homeowner’s insurance. If those payments are missed, you could face foreclosure.

Myth: 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 by the homeowner, typically over a five- or 10-year period. Reverse mortgage loans do not; the lender is paid when the house is sold or the estate settled. But reverse mortgages come with much steeper closing costs than home-equity loans.

Reverse mortgages make sense in certain situations and are the wrong choice in others. Call your wealth management team if you have questions about whether a reverse mortgage is right for you or a loved one—after all, we are The Planner You Can Talk To.