17 Common Misconceptions

1. A reverse mortgage sells the home to the bank

It is not in the interest of lenders to own homes — they operate with the sole motivation to make loans and earn interest on those loans. The homeowner keeps the title to the home in their name. The lender simply adds a lien onto the title in order to guarantee that it will eventually get paid back the money it lends.

2. Heirs will not inherit the home

The estate inherits the home as usual, but there will be a lien on the title. The lien consists of whatever proceeds were received from the reverse mortgage plus accrued interest.

For example, if a homeowner takes out a reverse mortgage and owes $50,000 after 5 years; then the homeowner passes away and the estate sells the house for $250,000. The lender gets $50,000 and the estate inherits $200,000.

A reverse mortgage is a “non-recourse” loan which means that the borrower (or his or her estate) will never owe more than the loan balance or value of the property, whichever is less; and no assets other than the home may be used to repay the debt.  Non-recourse means simply that if the borrower (or estate) does not pay the balance when due, the mortgagee’s remedy is limited to foreclosure and the borrower will not be personally liable for any deficiency resulting from the foreclosure.

3. The homeowner could get forced out of the home

The HECM reverse mortgage was created specifically to allow seniors to live in their home for the rest of their lives. Because the homeowner typically receives payments from a reverse mortgage instead of making payments to a lender, the homeowner can never be evicted or foreclosed on for non-payment. However, it is the homeowner’s responsibility to maintain the home in good condition, keep property insurance current, and pay the property taxes.

4. Someone can outlive a reverse mortgage

The reverse mortgage becomes due when all homeowners have moved out of the property for 12 consecutive months or passed away.

5. Social Security and Medicare will be affected

Government entitlement programs such as Social Security and Medicare are not affected by a reverse mortgage. However, need-based programs such as Medicaid may be affected. To remain eligible for Medicaid, the homeowner needs to manage how much is withdrawn from the reverse mortgage in one month to ensure they do not exceed the Medicaid limits. You should consult with a qualified financial advisor to learn how a reverse mortgage could impact eligibility of some government benefits.

6. The homeowner pays taxes on a reverse mortgage

The proceeds from a reverse mortgage are not considered income and therefore, are not taxable. Furthermore, the interest on the mortgage can be tax deductible when it is repaid. Consult a tax advisor for more information.

7. There are large out-of-pocket expenses

The majority of lender closing costs and fees can be financed into the reverse mortgage loan.  The usual exceptions to this are the appraisal and counseling fees.

8. A reverse mortgage is similar to a home equity loan

The only similarity between a reverse mortgage and a home equity loan is that both programs use the home’s equity as collateral.

·       Any homeowner can apply for a home equity loan, whereas a homeowner must be at least 62 years of age to be eligible for a reverse mortgage.

·       A home equity loan must be repaid in monthly payments over a period of 5 or 10 years. A reverse mortgage is typically not payable until the homeowner moves out of the property for 12 consecutive months or passes away.

·       A home equity loan that charges no closing costs often acquires a higher interest rate over the life of the loan. A reverse mortgage charges upfront closing costs but typically has lower interest over the course of the loan.