Reverse mortgages are a financial product that has gotten a lot of bad press over the years, leaving many people who could benefit from this type of loan with negative or problematic associations.
What’s the real problem with the reverse mortgage? Is it as bad as some media outlets would have you believe? The short answer is no, but don’t just take our word for it—we’ll prove it, too.
For starters, reverse mortgages are becoming more common among borrowers of all ages, with nearly half of homeowners considering a reverse mortgage under the age of 70, according to a MetLife Mature Market Institute study on the changing attitudes and motives of reverse mortgage borrowers.
The study revealed that homeowners looking into getting a reverse mortgage are interested for various reasons, including reducing household debt, enhancing their lifestyle, and planning for the future.
Do you have a problem with reverse mortgages?
If so, let’s look at a few issues commonly raised about this type of loan—maybe we can debunk some myths for you.
1. Reverse mortgages are a last resort.
Response: Not necessarily!
Reverse mortgages have often been considered a loan of last resort for borrowers who simply have no other options. And while they can be an excellent choice for individuals who are “cash poor, house rich,” this loan doesn’t have to be kept as a last-ditch effort to stay afloat.
“Using home equity as more than a ‘last resort’ can help to keep cash shortfalls from becoming big problems,” says MetLife in the study we mentioned above. “
For example, homeowners may use these funds to provide more choice and control, pay for home repairs and tax bills, and make other choices that allow them to stay home.
In some situations, a reverse mortgage may stabilize a problematic financial situation such as forestall foreclosure and allow the homeowners to find more effective solutions to their cash flow problems.”
2. The bank takes your home.
When you take out a reverse mortgage, you retain the title of your home. You are not transferring ownership to the bank; instead, the bank is allowing you to tap into your home’s equity as a loan.
The loan is generally repaid when borrowers sell their homes, but the bank does not automatically “take” your home unless you choose that method to repay your mortgage.
Myth 3. You won’t qualify for any benefits programs if you get a reverse mortgage.
Response: That’s not entirely true!
Reverse mortgage borrowers will still qualify for Medicare and Social Security programs available through age and entitlement qualifications, not on a needs basis.
However, needs-based programs such as Medicaid and Supplemental Security Income (SSI) may be affected by reverse mortgage proceeds because these programs consider an individual’s assets when determining if they qualify to receive benefits.
These considerations vary state by state, so if you are a Medicaid or SSI beneficiary, check your state’s requirements to determine if a reverse mortgage would affect your eligibility.
Reverse Mortgages are too expensive!
One standard warning financial planners may give on reverse mortgages is that they’re too expensive.
Fortunately, they don’t have to be.
There are fees associated with taking out a reverse mortgage, yes. But there’s also a federally insured product—the HECM—which substantially reduces the amount it costs to originate a loan.
The HECM reverse mortgage program requires borrowers to pay an upfront Mortgage Insurance Premium (MIP) of 2% of the loan’s value and an annual premium of .50% of the loan balance.
Another thing to consider is that many of the origination fees can be paid with reverse mortgage proceeds, so you don’t necessarily have to pay all the out-of-pocket costs.
You may even find some $0 Closing Cost Options depending on secondary market conditions.
Reverse mortgages will drain all the equity
Some detractors have used an argument that reverse mortgages use up all of a homeowner’s equity. While this can occur sometimes, it doesn’t have to happen.
Reverse mortgage borrowers can control how much equity they use. As mentioned above, if you only want or need a smaller loan, a HECM Saver could be the right option.
Not only would you benefit from smaller upfront fees, but it automatically limits the amount of equity you can draw down. Another option is for borrowers to make interest payments on their loans to preserve the equity in their homes.
This is a 100% voluntary option, meaning you don’t HAVE to make interest payments during the loan’s term.
But if you’re concerned about how much interest is being added to your loan, this could help you manage the size of your mortgage.
All Reverse Mortgage has developed the first-ever amortization calculator that can show you how to keep your reverse mortgage balance from rising by applying a monthly payment option.
An added perk in paying interest on your loan is that you can deduct it from your taxes, so if you’re interested in pursuing this option, talk to your tax advisor.
Reverse mortgages will make you stuck in your home
Reverse mortgages allow you to stay in your home—they don’t trap you there. Borrowers can repay their loans at any time if they so choose.
And if they need to leave their house to enter any care facility, they can, although they will be required to repay the mortgage (usually by selling the home).
For borrowers nervous about paying the upfront fees of a reverse mortgage, if they’re not sure how long they’ll be able to remain in their home, consider a HECM.
Suppose your home’s value has gone up significantly after you took out a reverse mortgage, and you think the amount of equity you’ve been able to access is too small.
In that case, you can even refinance your reverse mortgage for a higher loan amount or take advantage of better interest rates.