Common MisconceptionsCommon misconceptions about reverse mortgages
Since federally insured Reverse Mortgages have become so popular, it is not surprising that at times the FACTS are MISREPRESENTED. Here are several of these misconceptions:
MYTH: A federally insured Reverse Mortgage functions the same as any other type of home loan.
A federally insured Reverse Mortgage is a specific type of loan for homeowners aged 62 and older that lets you convert a portion of the equity in your home into cash.
But unlike a traditional home equity loan or second mortgage, you don’t have to repay the loan until you either no longer live in the home as your principal residence or you fail to meet the obligations of the mortgage.
MYTH: Most borrowers use their loan funds for vacations and other pleasures.
Incorrect, most borrowers today use their loans for immediate needs, such as paying off debts or their existing mortgage.
About a third of homeowners who consider these loans want to supplement their monthly income, that will enable them to continue living in their own home longer.
MYTH: Federally insured Reverse Mortgages are too expensive.
Taking out any home loan can be costly because of origination fees, third-party closing charges (such as an appraisal, title search, and recording costs), and servicing fees. You can pay for most of these costs as part of the reverse mortgage loan.
Borrowers who select a traditional reverse mortgage, also must pay an upfront FHA mortgage insurance premium that can be as much as two percent (2%) of the value of their home. This insurance guarantees that you will receive the expected loan payments.
In addition, you (or your heirs) don’t have to repay more than the value of the home, even if the amount due is greater than the appraised value.
The HECM Saver reverse mortgage is less expensive because it all but eliminates the upfront insurance fee. However, borrowers get a smaller loan amount with a HECM Saver than with a standard reverse mortgage loan.
MYTH: Most people who take out a Reverse Mortgage are elderly widows.
When HECMs were first offered by the Department of Housing and Urban Development (HUD), a large proportion of borrowers were older women looking to supplement their modest incomes. But that has changed.
During the housing boom, many older couples took out reverse mortgages to help fund emergencies and for extra cash to enjoy life. In today’s economic recession, younger borrowers (often boomers) are turning to these loans to manage their existing mortgage or to help pay down debt.
MYTH: Reverse Mortgages should only be used as a last resort.
It’s never a good idea to make a financial decision under stress. Waiting until a small issue becomes a big problem reduces your options. If you wait until you are in a financial crisis, a little extra income each month probably won’t help. Reverse mortgages are best used as part of a sound financial plan, not as a crisis management tool.
If you live on a limited income, there are many public and private benefits that can be an alternative or supplement to a federally insured reverse mortgage. Find out if you may qualify for help with expenses such as property taxes, home energy, meals, and medications at BenefitsCheckUp®.
MYTH: A fixed rate Reverse Mortgage is always a good idea.
If you’re like most homeowners, you’ve had a traditional 30-year home loan with a fixed interest rate, which allowed you to know how much you needed to budget for mortgage payments each month.
However, this conventional thinking does not apply to reverse mortgages, which do not require any monthly payments.
There are several drawbacks to reverse mortgages with fixed interest rates. These loans require borrowers to draw all of their funds out at closing, which means they will pay interest on a potentially large sum of money. This could use up your home equity very quickly.
An adjustable rate reverse mortgage, on the other hand, gives borrowers the option to select a line of credit and only pay interest on what they use. The line of credit may increase over time if interest rates go up, giving borrowers access to more cash.
MYTH: Reverse mortgage counseling is a waste of time.
Deciding whether to take out a reverse mortgage loan is challenging. It’s hard to estimate how long you’ll stay in your home and what you’ll need to live there over the long term.
Federal Law requires that all individuals who are considering a federally insured reverse mortgage, receive unbiased counseling by a HUD-approved counseling agency.
A trained counselor can help you understand the costs and features of different types of reverse mortgage, and evaluate the pros and cons of these loans for your situation. They will also discuss other options including public and private benefits that can help you stay independent longer.
MYTH: Most borrowers who end up facing foreclosure were scammed.
It is possible for a reverse mortgage borrower to face foreclosure if they do not pay their property taxes or insurance, or maintain their home in good repair. This is especially a risk for older homeowners who take the entire loan as a lump sum and spend it quickly—perhaps as a last-ditch effort to salvage a bad situation.
Those who struggle to pay the bills each month can become overwhelmed by health or other large expenses, making it difficult to keep up with borrower obligations. Older homeowners may be targets for scam artists who offer too-good-to-be-true real estate or investment deals. Sadly, there are also cases where seniors are talked into a reverse mortgage by family members who want to get their hands on the cash.
That’s why reverse mortgage counseling is so critical. The counselor will help you look at the long-term responsibilities of a loan, not just the short-term benefits.
As a HUD Approved Counseling Agency, our Reverse Mortgage counselors will discuss the facts of a Reverse Mortgage with you and upon completion of the session will present you with a Certificate of Counseling.
Reverse Mortgages are increasing in popularity with seniors who have equity in their homes and want to supplement their income.
The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage or HECM, and is only available through an FHA approved lender.