Everyone knows that a reverse mortgage can be a powerful financial planning tool for seniors when used under the appropriate circumstances – right? Well, apparently not. Even with all the publicity over the past few years about how much better today’s reverse mortgages are, and even with a growing chorus of once-skeptical financial planners singing the praises of reverse mortgages, common misconceptions still linger.
That’s why we were drawn to this recently-published article on a website called RIS Media. The article, reprinted from the popular financial website Bankrate.com, is called “Reverse Mortgages: 7 Common Misconceptions.” Whether you’re in the market for a reverse mortgage or not, we suggest you take a look at this article, because it may come in handy next time a friend repeats one of these myths about reverse mortgages.
First, however, let’s consider a brief bit of background. Reverse mortgages, also known as home equity conversion mortgages, or HECMs, allow homeowners 62 and older to tap into a portion of their equity to help supplement retirement income. Borrowers don’t have to make monthly mortgage payments, but they must keep current on all property taxes, homeowners insurance, and home maintenance. Homeowners can borrow a lump sum, take regular monthly payments, or establish a line of credit which grows over time. In the past, these loans earned a sketchy reputation, partly because of some of the lending practices of unscrupulous mortgage officers and partly because early regulations lacked adequate protection for borrowers. Even though changes in federal law in the past few years eliminated much of the gray area that once made reverse mortgages riskier, some of that negative perception persists. But as you’ll find if you explore the power of an HECM, those perceptions are often groundless.
For example, says the RIS Media article, there are some people to this day who call reverse mortgages “a scam,” implying that they are unregulated and risky. What these skeptics don’t realize, however, is that today’s reverse mortgage market is highly regulated. “Today’s reverse mortgage loans are quite viable instruments and the FHA-insured HECM loans are safer than ever,” the article asserts. When properly managed the risks to the borrower are generally minimal, which is why many former nay-sayers have become reverse mortgage cheerleaders.
The second misconception in the article is that these loans are “loans of last resort.” While it’s true that we at AgingOptions generally advise against unnecessary borrowing that could put your largest asset – your home – at risk, there are many ways that an HECM can help you in retirement, including allowing you to pay uncovered health care costs, making it possible for you to upgrade your home so you can age in place, and helping you delay taking Social Security benefits too early. Because of their versatility, reverse mortgages represent a powerful planning tool that many retirees continue to overlook.
Here are the rest of the seven misconceptions. You’ll find more details in the RIS Media article, but the best way to truly explore this topic is to sit down with a responsible reverse mortgage expert and get all your questions answered.
“Can your spouse be ‘thrown out of the house’ when one of you dies?” The answer is no. This is a major change to earlier laws governing reverse mortgages, and it basically says your eligible non-borrowing spouse can stay in the home after you pass away.
“Are the fees and origination costs prohibitively high?” It’s true that, like any loan, an HECM costs money to originate, but the amount depends on a number of factors including the borrower’s age, the location and value of the home, and any existing mortgages on the house. Loan costs have generally come down since the early days of reverse mortgages, and you’ll probably be pleasantly surprised at how reasonable HECM fees turn out to be.
“Does your home have to be fully paid off before you take out an HECM?” The answer is no. In fact, one of the great benefits of a reverse mortgage is that it can enable you to eliminate your house payment by paying off the first mortgage balance. This can be a huge boon to retirees on limited income.
“If your home declines in value, are your heirs on the hook for the difference between the loan amount and the selling price of your house?” Fortunately your heirs are protected, says the RIS Media article. While they will be required to pay back your loan when you and your spouse both die, either by selling the house or taking out a mortgage and purchasing it themselves, if the sale of your home doesn’t cover the reverse mortgage balance the FHA pays the difference. Even in a “down market” their risk is minimized.
Finally, people ask, “Does the bank own your home when you have a reverse mortgage?” Actually, you retain ownership, not the bank. The lender has a lien on your property, but if you keep taxes and insurance current and abide by any other loan provisions, the home remains yours.
So what’s the next step if a reverse mortgage intrigues you? We suggest you contact us at AgingOptions and allow us to put you in touch with a trusted, reputable reverse mortgage expert, such as Laura Kiel of Kiel Mortgage. A professional adviser like Laura can answer all your questions without any sales pressure, and help you make the decision that’s right for you. We also stand ready to help you with all the rest of your retirement planning questions, using a unique and comprehensive approach we call LifePlanning. Is it possible to have your medical, financial, housing, legal and family strategies all linked together like pieces of a puzzle? With a LifePlan the answer is yes. You can find out how by attending one of our upcoming LifePlanning Seminars – offered without cost or obligation. Simply click here for information and registration, or call us at AgingOptions. It will be our pleasure to guide and assist you as you plan for a fruitful and secure retirement.
(originally reported at www.rismedia.com)