Reverse mortgages can seem confusing and are often surrounded by myths, especially about their downsides. These tools are meant to help seniors use the value of their homes without having to move out, but they are often not well understood. In this article, I want to clear up any confusion by looking at the ten most common worries people have about reverse mortgages.
I’ll use expert opinions and facts to clarify things and challenge the myths. This will help you understand reverse mortgages better. Whether you’re considering getting a reverse mortgage for yourself or someone you care about, this article will give you the information you need to make a smart choice without being misled by common myths.
10 False Claims on Reverse Mortgage Downsides
Reverse mortgages can be an excellent way for seniors to get some financial freedom, but it’s important to know the whole story. This article dives into ten common concerns about reverse mortgages and what the experts have to say to set the record straight.
Claim #1. Reverse Mortgages Have Growing Interest and Fees
Although not having to make monthly payments might seem beneficial, the accruing interest compounds over the loan’s life, significantly increasing the total amount owed.
Reality: Interest accrues on all loans. If you would rather not have the interest accrue, giving you more money now, you can choose to make payments at any time, and there is never a prepayment penalty. So, it’s entirely up to you. You can choose to pay some or all the accruing interest at any time during the life of the loan or wait and pay it at the end of the loan.
Claim #2. Reverse Mortgages Have Complex Loan Terms
The intricate details of reverse mortgages can be difficult to grasp. Some borrowers may find themselves surprised by certain conditions regarding loan repayment or property use limitations.
Reality: There is no pressure to complete the loan, so between your counseling, all the online resources, and a good lender who will work with you at your pace, you can be sure you understand the terms and requirements, or you can cancel the loan at any time.
Claim #3. Reverse Mortgages Affect Needs-Based Programs
Effect on Needs-Based Programs: Proceeds from a reverse mortgage might affect eligibility for government programs like Medicaid or Supplemental Security Income (SSI). Evaluating how this financial step could impact your benefit status is important.
Reality: Borrowers who participate in needs-based programs need to ask the counselors at the program what would negate or endanger their program. For example, many needs-based programs are dependent on borrowers’ assets at the end of each month. If you participate in such a program, you can have a reverse mortgage and draw funds for needed expenses, but you must be diligent to be sure you use those funds so that they are not still in your account at month-end when your balance is reported. You need to know your program requirements, and you do not inadvertently make yourself ineligible for your needs-based program simply due to loan proceeds, which you allow to accumulate in your accounts.
Claim #4. Reverse Mortgages Create Repayment Problems for Heirs
The loan must be repaid upon the borrower’s death, relocation, or sale of the home. This situation places heirs in the position of needing to sell the home or refinance the debt to keep it.
Reality: The reverse mortgage was not intended to be a multi-generational loan. The best way to avoid issues later is to communicate with your heirs so they know what needs to be done after the last borrower passes or permanently leaves the home. Give them authorization to speak with the lender and the lender with them on behalf of the loan so that they do not need to waste time just getting information. Having a family trust or adding your heirs to the title with you in advance helps save time (speak to your family estate attorney for advice regarding your legal matters). Have a plan. No one likes to discuss death and disability, but if you have a plan and your heirs know what needs to be done, they can act swiftly and decisively, and the pressure to act is greatly reduced.
Claim #5. Reverse Mortgages are Rising Debt/Falling Equity
As you receive payments and interest adds up, your home’s equity decreases, potentially leaving less for your heirs. The non-recourse feature ensures debt won’t exceed the home’s value, but it might consume all equity if you live beyond life expectancy or your home value does not appreciate.
Reality: You can always outlive your equity if the home does not appreciate, and the interest continues to accrue with a reverse mortgage on a home that does not appreciate. But if you were to obtain a 30-year forward loan and your home never appreciated, you could also pay more principal and interest over the life of the loan than the property is worth on the forward or traditional loan. The big difference is that with the reverse mortgage, you don’t have to make payments of principal and interest during the time you have the loan, and since the reverse mortgage is a non-recourse loan, even if you put all the money, you don’t pay in payments in a bank account, the lender can never look to your estate or your heirs to pay back any amount that the sale of the property did not cover of the loan balance (even if your estate had other assets or you left them cash you were able to save by not making payments).
Claim #6. Reverse Mortgages Have Occupancy Restrictions
Should you need to move out permanently, such as relocating to a nursing home, the loan becomes due, which could complicate your ability to adjust living arrangements.
Reality: You can be absent for up to 12 months for temporary rehabilitation. If it becomes obvious that you will not be able to return and that your situation is permanent, don’t wait until your 12 months have passed before you begin to act. Most people know within a short time if their situation will be temporary or permanent. If the need arises, start as early as possible to give yourself time to make a plan that is best for you and your family and is not pressured due to a need to act quickly.
Claim #7. Reverse Mortgages Can Be a Burden on Heirs
Heirs often find themselves unprepared for the reverse mortgage’s impact, facing the need to understand and manage loan repayment to prevent foreclosure.
Reality: As stated previously, heirs are usually unprepared when they are surprised by the presence of a reverse mortgage and how to deal with it. If they are educated about the loan, the process required to repay it and the groundwork has already been laid to transfer title and connect them to the lender and authorize communication, it can be so much easier and less stressful.
Claim #8. Borrowers Must Maintain Taxes & Insurance
Keeping up with home maintenance, homeowner’s insurance, and property taxes is mandatory. Neglecting these responsibilities can trigger a loan default, risking foreclosure.
Reality: You have the same requirements with any loan. The lender will not lend money and watch their property deteriorate or watch liens accumulate due to non-payment of property charges.
Claim #9. Reverse Mortgages Have Risk of Negative Equity
In a declining housing market, there’s a risk the loan balance could exceed the home’s value, especially if the property doesn’t appreciate as anticipated.
Reality: Here again, if property values dropped, anyone with a loan could experience a situation whereby the loan balance could exceed the value of the home. It happened nationwide from 2009 through 2013 and not just to the owners of properties with reverse mortgages. However, reverse mortgages are non-recourse loans, and the borrowers’ estates or their heirs can never be made to pay for a shortfall between the property value and the loan balance. Furthermore, if an heir wants to keep a relative’s home whose value has declined, they have the option to pay the loan in full at the amount owed or 95% of the current market value. For example, if your mom’s reverse mortgage has a current balance of $150,000, but due to falling values in the area, her current market value is just $100,000, HUD will accept $95,000 as payment in full for that loan! Or if the heirs don’t want the home or the responsibility, they can walk away and owe nothing. Neither the lender nor HUD can look to any other assets of the borrower or their estate to cover the $50,000 shortfall that the sale of the home will not cover due to the loss of value.
Claim #10. Potential for Scams
The complexity of reverse mortgages can attract scams. Seniors should seek reputable, HUD-approved lenders to avoid deceptive practices.
Reality: We have analyzed many scams involving seniors with both reverse mortgages and traditional forward mortgages. Finding a reputable lender is extremely important, but staying active and engaged with senior relatives is also important. When really dissected, the problems are usually not the loan but what happened to the money. Anyone who can gain the trust of seniors or others with access to equity in their home has the potential to take advantage of that trust. I advise family members to talk with senior homeowners and listen if they want to talk about a reverse mortgage with you.
By being aware of these challenges, seniors can better assess whether a reverse mortgage aligns with their financial goals and circumstances. It’s about making informed decisions and clearly understanding the potential impacts on your financial health and estate.
Exploring the Benefits: How a Reverse Mortgage Can Enhance Your Retirement
A reverse mortgage can be a game-changer for many older adults, offering a mix of financial security and the freedom to live retirement on their terms. Let’s look at how it can help:
Making Your Home Age-In-Place Friendly: Need to make your home safer and more comfortable as you age? A reverse mortgage can fund essential upgrades, like installing ramps or walk-in tubs, making it easier to live in your home longer.
Spend How You Wish: With a reverse mortgage, you get to decide how to use the money. Cover everyday expenses, fund a few trips, or keep it aside for unexpected bills. It’s your call.
Buy a New Home: Did you know you can use a reverse mortgage to buy a new home that fits your retirement lifestyle better? It’s a lesser-known perk that can make relocating in retirement smoother.
Paying for Care at Home: Health care needs can change as you age. A reverse mortgage can help pay for necessary in-home care, relieve financial pressure, and help you stay in your home.
Emergency Fund: Life throws curveballs, and having a financial cushion for surprises is critical. A reverse mortgage can be that safety net, giving you and your family peace of mind.
Protected by FHA Insurance: With a Home Equity Conversion Mortgage (HECM), you get several benefits, thanks to FHA insurance:
- Spousal Protections: If your spouse isn’t borrowing with you, they can still stay in the home under certain conditions after you pass away.
- Non-Recourse: You or your heirs won’t have to pay back more than your home’s selling price, even if it’s less than what you owe.
- Guaranteed for Life: As long as you live in your home and keep up with taxes and insurance, you can access your line of credit or regular payments as planned.
A reverse mortgage can be more than just a way to use your home equity. It offers a flexible strategy for making your retirement enjoyable and secure.
Reverse Mortgages: Assessing the Pros and Cons
|Provides access to home equity without monthly mortgage payments.
|Limited options for further borrowing against home equity.
|Repayment is deferred until the homeowner moves out, sells the home, or passes away.
|Can result in less inheritance for heirs.
|Can serve as a supplemental income source in retirement.
|Loan balance can increase over time, reducing home equity.
|Typically allows for a fixed rate on lump sum payouts.
|Interest accumulates over the life of the loan, increasing the total debt.
|Impact on Heirs
|Heirs can choose to keep the home by paying off the reverse mortgage or selling the home.
|Heirs might receive less from the estate due to the reverse mortgage borrowed.
|Homeowners retain the title and ownership of the home.
|Homeowners are responsible for property taxes, insurance, and maintenance.
|Available to homeowners aged 62 and older.
|Not available to younger homeowners, limiting accessibility.
What is the downside of a reverse mortgage?
Is a reverse mortgage ever a good idea?
Can you lose your home with a reverse mortgage?
As with any mortgage, there is a loan agreement that you must adhere to. Reverse mortgage underwriting guidelines require that the borrower pay property charges on time, maintain the property, and occupy their home as a primary residence. If you fail to do so, the loan servicer may call the loan due and payable and force the borrower to refinance or sell the home. Suppose your loan balance exceeds the current property value at default. In that case, you may lose your home to foreclosure and have no equity remaining, so it is important to keep up with the loan commitments, as you can remain in the home for life regardless of the value as long as you continue to meet the loan terms. As with any financial product, you should seek counsel from your trusted advisor, and careful consideration and suitability should be discussed.
What happens to a reverse mortgage when you die?
Is a reverse mortgage a scam?
My husband is 62, but I will be 62 in December. If we had a reverse mortgage now, would I be added in December, or would I be unable to go on the mortgage?
Making Informed Decisions About Reverse Mortgages
While reverse mortgages can provide financial relief and greater flexibility during retirement, they have drawbacks and complexities. It is essential for homeowners to understand these aspects fully and to make an informed decision based on their circumstances, plans, and the needs of their heirs. Consulting with a financial advisor, an attorney specializing in elder law, or a HUD-approved counselor can provide valuable insights and guidance.