A recent comment from our reader:
To whom it may concern:
I have read so many reverse mortgage info. It sounds like it is not really to help you but for the bank to help themselves.
It is designed to make you think they are helping you, but the truth is you are really 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 is really themselves, they are helping. they know if you are 62 and over you are already looking death close in the face.
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 do not know your social worker and I cannot comment on the circumstances his friend went through, but he did not give you accurate information on the HUD HECM Reverse Mortgage Loan.
The Truth is, Title is YOURS.
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.
Disbursement of Fund
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.
You Own Your Home
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 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 have seen so many articles written by people who heard something, did a halfway 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.
Counseling & Education
Do not get me wrong, the social worker may have known someone who had something happen, but it is 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.
Top 5 FAQs
How do reverse mortgages really work?
A reverse mortgage is a loan that allows a homeowner to borrow money using their home as the collateral without the burden of having to make a monthly mortgage payment. This allows homeowners to access equity in their home without increasing their monthly expenses. The proceeds on a reverse mortgage can be used for whatever purpose the borrower chooses. The funds can be accessed via a line of credit, scheduled monthly payments, cash advances or a combination of these options.
Is a reverse mortgage a scam?
A reverse mortgage is not a scam. It is simply a loan that works in the opposite or “reverse” of a traditional loan. Instead of making monthly payments every month over a specified timeframe to pay the loan off, all interest and payments are deferred until the loan reaches maturity. This means the balance on the loan will increase over time rather than decreasing because you are not making a mortgage payment.
When is a reverse mortgage a good idea?
There are several instances when a reverse mortgage is a good idea for a homeowner. One of those is payment relief. If your current mortgage is too expensive to afford in retirement, the reverse mortgage may end up being the perfect solution to eliminating that expense from your budget to facilitate your retirement goals. Other instances include cash out for home remodel, additional funds for payment of taxes and home repairs in the future, preserving retirement assets such as 401K, IRA and other savings and sometimes simply to improve overall quality of life.
Do you pay interest on a reverse mortgage?
A reverse mortgage is in fact a loan and therefore there is interest charged on a reverse mortgage. However, you are not paying the interest on a monthly or yearly basis like you would with a traditional mortgage. The interest on the reverse mortgage is added to the balance and is not actually paid until the loan is paid off either by sale, refinance or other means.
What are the drawbacks to taking a reverse mortgage?
The drawbacks on a reverse mortgage can be that the closing costs can be higher than a traditional loan, the property must be your primary residence, the loan is not assumable and there may be less equity to leave to your heir as an inheritance. On the Home Equity Conversion Mortgage (HECM) program, there is an initial mortgage insurance premium charged by HUD which is 2% of the property value or max claim (whichever is less) which leads to higher costs for these loans than a traditional loan. It should be noted however that proprietary reverse mortgages have costs that are comparable and sometimes less than a traditional loan. When you have a reverse mortgage, the property must be your primary residence so if you have a reverse mortgage and want to move out of your home without selling it you would have to pay off the reverse mortgage before moving out. When a homeowner dies with a traditional loan, the heir can assume the loan and continue to make the payments on it to keep it in good standing. With a reverse mortgage, the loan becomes due and payable upon the last surviving borrower leaving the home permanently so the heir cannot assume the reverse mortgage and must address it via selling the property, completing their own refinance of the loan or paying it off by other means. Lastly, when you have a reverse mortgage your balance increases over time since you are not having to make a mortgage payment.
This can lead to less equity in the home over time and therefore less of an inheritance for your heir.
ARLO recommends these helpful resources: