Myths vs. Realities of Reverse Mortgages

​You may have heard of reverse mortgages but don't fully understand them. Or, you may have heard bits-and-pieces, Myths vs. Realities of Reverse Mortgages Blogbut don't have a strong grasp. ​

Unfortunately, there are several misconceptions surrounding the topic of reverse mortgages. To help as you consider whether a reverse mortgage is a viable option for you, I wanted to share six myths that were recently shared by Donna Litton, a professional reverse mortgage adviser with Sterling Mortgage Services.

First, let's make sure we have a good grounding on what a reverse mortgage is:

A reverse mortgage is a loan available to homeowners, 62 years or older, that allows them to convert part of the equity in their homes into cash. It is called reverse mortgage because the lender makes payments to the borrower versus a traditional mortgage where the borrower is making monthly payments to the lender.

The borrower is not required to pay back the loan until the home is sold or otherwise vacated.  As long as the borrower lives in the home, staying up-to-date with homeowner's insurance, HOA/Condo association payments and property taxes, and maintains the home in line with FHA requirements, he or she is not required to make any monthly payments towards the loan balance. 

Myth No. 1: The lender owns the home

This is incorrect information. In fact, the home owner will retain the ownership and title of the property during the loan life. 

Myth No. 2: The home must be free and clear of any existing mortgages

Quite the opposite as many individuals pursuing reverse mortgages are using the reverse mortgage to pay off their existing loan to get rid of monthly mortgage payments. 

Myth No. 3: Once loan proceeds are received, you pay taxes on them

Reverse mortgages are not considered income and therefore the reverse mortgage loan proceeds are tax-free. As always, consult your financial advisor and appropriate government agencies for any matters related to your taxes and any government benefits. 

Myth No. 4: There are restrictions on how the loan proceeds can be used by the borrower

Once any existing mortgage or lien has been paid off, the net loan proceeds from your Home Equity Conversion Mortgage (HECM) loan can be used for any reason. There are many borrowers who will choose to use this money to supplement their retirement income, delay social security benefits, pay off outstanding debts, contribute toward medical costs, make improvements to their home, etc. 

Myth No. 5: Reverse mortgages are for financially disadvantaged 

No way! Many affluent senior borrowers with multimillion dollar homes and healthy retirement assets are using reverse mortgage loans as part of their financial and estate planning, and are working closely in conjunction with financial professionals and estate attorneys to enhance the overall quality and enjoyment of life.

Myth No. 6: The loan obligation will be passed onto my children or heirs

Reverse mortgages are a non-recourse loan. If your heirs wish to keep the home and the loan balance is more than the home value, they would only have to pay 95 percent of the appraised value to keep the home.