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Misconceptions of Reverse Mortgages

A reverse mortgage is a special type of financing in which an eligible homeowner can draw cash from their home’s equity. Originally created to help elderly widows keep their homes after their husbands passed away (back in the days when it was still uncommon for women to work), the reverse mortgage is a popular choice for seniors desiring supplemental funds for a more comfortable retirement. Recently, several people have acquired misconceptions about reverse mortgages. However, a reverse mortgage isn’t something you should automatically shy away from. In fact, it could be perfect for your situation.

Before rejecting the idea of a reverse mortgage, allow us to quell some of your fears by shining a light on the most common reverse mortgage misconceptions.

Misconception: I have to own my home outright to qualify for a reverse mortgage.

Truth: Not necessarily. If you have a modest mortgage balance (about 55% or less), and have built up some equity, you may be eligible for this safe, federally insured program with little to no out of pocket expense.

Misconception: I’ll be handing my home over to the bank.

Truth: Just like with a conventional mortgage, reverse mortgage customers retain title ownership of their home. The lender does not ever hold title to your home and monthly mortgage payments are not ever required.

Misconception: I’ll no longer be eligible for Social Security or Medicare.

Truth: Since funds from a reverse mortgage or credit line are not considered income, your entitlement-based government benefits will not be affected. However, some need-based benefits such as Supplemental Social Security Income or Medicaid may be affected. Please check with your caseworker or a qualified reverse mortgage counselor for more information. Through proper planning reverse mortgage funds can provide “gap income” to help you hold off from taking social security income until such time as you are old enough to optimize your monthly social security benefit.

You can find a counselor in your area by searching through the HUD’s website here: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/hecmlist

Misconception: My children will be burdened by the mortgage debt when I die.

Truth: Once you no longer use the property as your primary residence either by selling, vacating or passing away, it is not true that your heirs will be held liable for the remaining balance. In most instances, your estate will sell the property and any remaining equity will flow through to your estate or beneficiaries. If the sale proceeds are not enough to satisfy the loan balance, the federal government will absorb the loss and your kids will not be held responsible for paying off the balance – this is known as the “non-recourse feature “ of a HECM reverse mortgage or credit line.

Find out more information on reverse mortgages and affects on children and heirs here.

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Misconception: The bank has to approve how I spend the money.

Truth: The funds you receive from your reverse mortgage or credit line come with no restrictions. You are free to use the funds however you wish for whatever is important to you. Many people choose to pay off an existing mortgage, medical bills and/or other debts. Some use the funds to pay for a spouse’s assisted living costs or just to help with the everyday cost of living. Bottom line, you are free to use your funds however you wish for whatever is important to you.

Misconception: I’ll have to pay taxes on the money I receive.

Truth: Anything you receive from a reverse mortgage or credit line is not considered income; therefore, you are not required to claim these funds for income tax purposes.

Misconception: The lender could kick me out of the home.

Truth: Your lender cannot force you out of your home. They can, however, call the loan due if you fail to pay your property taxes or home insurance. You must also maintain the home so it remains safe for your ongoing occupancy.

Misconception: I will be forced to pay for costly financial counseling.

Truth: The U.S. Dept. of HUD requires all HECM reverse applicants to consult with a HUD approved counselor. Your lender is not permitted to steer you to a particular counselor but can supply you with a HUD approved list. Fortunately, counseling is often available for a modest fee, and some counseling agencies permit funds from the reverse loan to cover the cost.

Misconception: It’s not possible to learn enough to make an informed decision.

Truth: Your Alpha Mortgage reverse mortgage professional is committed to the principles of sound decision making and complete customer education. We are sensitive to the fact that considering a reverse mortgage can be a weighty decision. We encourage clients to slow down and consider planning advice from other trusted advisers like their financial planner, CPA, estate/tax planning/eldercare attorney, real estate agent, and/or loved ones. Our goal is your total satisfaction.

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For additional information, visit the following resource page:

U.S. Department of Housing and Urban Development, FHA Reverse Mortgage for Seniors

Learn more about how people are using home equity conversion mortgages for purchasing homes:

Please keep in mind that the reverse mortgage industry is constantly changing and some of the information contained on this site may not be current. Please ask a licensed reverse mortgage professional for up-to-date guidelines.