truth about reverse mortgages

A recent comment from our reader:

To whom it may concerns I have read so many reverse mortgage info. sounds like it’s not really to help you but to help themselves. It’s designed to make you think they are helping you, but you really are giving away your home. you are selling it to them for a very low price. If you get the reverse loan in Dec./ 2012 and die in Jan.2013 you have lost your home, you just gave it away your family can’t do anything about it and cannot have it even with a will. My social worker told me his friend did that and they took his home from him because you must sign over your deeds to them and your home becomes theirs, they can do whatever they want to because the house are theirs. So, I don’t know’ you better be really careful about peoples claiming they are helping you. Because it’s really their selves they are helping. they know if you are 62 and over you are already looking death close in the face. – Martha

Hi Martha,

We agree with you on one point…reverse mortgages are not for everyone and every borrower needs to understand the scope of the loan and what is required of them and what it will and will not do. Unfortunately though, that is where our agreement ends! I don’t know your social worker and I can’t comment on the circumstances his friend went through, but he did not give you accurate information on the HUD HECM Reverse Mortgage Loan.
Firstly, you are not selling your home. You always retain title and the title passes to your heirs, not the bank, should you pass away. When you do finally move out of the house permanently, the loan does become due and payable…but only the amount you borrowed and any accrued interest. In your example, you stated that if you passed just a month later, you lose your home and the family loses all interest as well. This is not accurate and I really hate to hear people who spread mistruths such as this.
There are several ways to receive your proceeds on a reverse mortgage, you can choose a lump sum distribution, a monthly payment, leave it in a line of credit you can access when you want or any combination of these choices. Once you start the loan, you pay interest only on the portion of the loan that you borrow.
In other words, if you have a Line of Credit available in the amount of $100,000 but you only take out $10,000 to do some work on your home, you only pay interest on the $10,000 you actually received, not on the money you have left in the line (just like a Home Equity Line of Credit or HELOC).
Again, using your example, if you passed one month after you got your loan, you family would have to pay the amount of the loan you took (10,000), any fees you financed and the interest that accrued which, at today’s rates would come to about $38 on those amounts.
Your family would have the right to decide if they wanted to pay the loan off and keep the house or to sell it and pay the loan in that way. But again, they would only pay any outstanding balance. Your assertion that you “sign a Deed” to the bank is absolutely untrue. You do sign a Deed of Trust or Mortgage (depending on the state in which you live) to secure the loan, but you would sign the same sort of security instrument with any loan. It does not give the lender title to your property.
I’ve seen so many articles written by people who heard something, did a half-way job of researching the loans that it is frustrating that there is so much misinformation available. Here again, some unknown person who I cannot question to find out what really happened (if the person even exists and your friend wasn’t exaggerating) is used as an example of why people need to fear a reverse mortgage when the reported “facts” can’t even be true.
Don’t get me wrong, the social worker may have known someone who had something happen, but it’s like the old game of operator we all used to play as kids. By the last telling, not much of the statement is accurate. A reverse mortgage does require you to understand the terms and to do your homework. But there are counselors approved by the Department of Housing and Urban Development (many of whom provide free counseling) who can tell you the real story of reverse mortgages so you can make an informed decision as to whether this is the right loan for you.
Unfortunately though, too many people hear horror stories like the one you just told that cannot even be true just based on the terms of the loan. I would encourage you not to take my word for it (and certainly not the word of someone who has already given you totally false information), but contact HUD, AARP, or the National Reverse Mortgage Lenders Association (NRMLA) to get the REAL facts about reverse mortgages.
It may still not be the right loan for you, but at least you will have made that decision based on the knowledge of the truth about the way the program really works.

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