Why do Reverse Mortgages instill apprehension in some Older Americans?
Fears persist despite the enthusiastic endorsement of groups such as AARP and the National Council on Aging.
A major reason is likely to be the fact that a lot of misinformation has been circulating about this very attractive financial tool for those that qualify. Older Americans often consult friends and relatives who are likely to be misinformed themselves.
Since the Reverse Mortgage can be a beneficial and safe alternative for Older Americans, it’s important to correct the major misconceptions associated with them and allow older homeowners to make an informed decision about whether a Reverse Mortgage makes sense for them.
Probably the most common misconception is ” If I obtain a reverse mortgage I might lose my home”. I frequently hear this when I’m advising elders about planning options related to long-term care. The fact is that the federal government requires that the home must stay in the name of the borrowers only. Since the Reverse Mortgage is a mortgage, a lien is placed on the property like all other mortgages. This assures that the lender will eventually be repaid but for only the amount owed which is principle, interests, and closing costs, just like any other mortgage.
The great advantage of this type of mortgage is that -unlike traditional mortgages-there are no monthly payments. Not having to worry about monthly bills has to be one of the greatest gifts one could wish for in retirement.
More than ninety-five (95) percent of Reverse Mortgages approved are the Federal Housing Administration (FHA) Home Equity Conversion Mortgage (HECM) loans. These loans are guaranteed the full protection of the United States Government through use of a two (2) percent insurance fee paid on all FHA Reverse mortgages.
Another misconception is that Reverse Mortgages are costlier than other mortgages. The truth is that closing costs average only about one (1) percent more than a traditional FHA mortgage would be on the same property. The Reverse Mortgage may even be lower in cost due to the fact that conventional mortgages can charge more than the two (2) percent origination fee allowed on all Reverse Mortgages.
Another cost factor is of course, the interest rate. The FHA Reverse Mortgage interest rate is based on the one (1) year United States Treasury note instead of the prime rate, which most conventional mortgages use as their base. This gives the FHA Reverse Mortgage an interest rate LOWER than most adjustable conventional mortgages.
Another myth about reverse mortgages is that the home goes to the lender after the loan becomes due at death or when the last survivor permanently leaves the home. In my experience, the loan amount of approved is generally about half of the appraised value of the home. (The older the homeowner, the greater the amount available for borrowing because it’s assumed that the funds will be available for a shorter period.
All of the equity left after payment to the lender, goes to the estate or heirs of the borrower. This is exactly the same procedure followed with regular conventional mortgages.
Since the Reverse Mortgage is a “non-recourse” loan the most the estate will be required to pay to the lender is the value of the home at the time of repayment. This is true even if the home value decreased or the borrower lived to an unusually old age.
Another attractive feature of this financing tool is that the requirements for getting a Reverse Mortgage are not nearly as restrictive as other loans. Since no re-payment is made as long as one (1) surviving borrower remains in the home, there are NO income or credit requirements. Another requirement is that both spouses must be sixty-two (62) or older with no upper age restriction. The only other requirement is that the borrowers alone must own the home with no others on the deed. The home may also be in a revocable trust as long as the eligible borrowers are the only trustees.
All property types are Reverse Mortgage eligible except manufactured (mobile) homes built before June 15, 1976 and co-operatives (Co-ops). Co-ops are expected to be eligible in the future when FHA issues final approval. Homes with existing mortgages that can be paid from the equity can obtain Reverse Mortgages.
Still another misconception is that a Reverse Mortgage is taxable and affects Social Security and Medicare. That is NOT the case. Reverse Mortgage proceeds are not taxable because they are not considered income but is, in fact, a loan.
It should be noted that Supplemental Security Income (SSI) and Medicaid might be affected if you exceed certain liquid asset amounts. We can show you how to structure the loan so that a Reverse Mortgage will not affect these benefits.
Now that the myths of Reverse Mortgage have been removed, a qualified homeowner may ask, how can I get more comprehensive information? Is your local bank the answer? Only a few lenders have been approved for participation by the federal department of Housing and Urban Development, which oversees the program. Most local and regional banks do not offer Reverse Mortgages.
AARP, the Federal National Mortgage Association, American Bar Association (ABA) and the National Council On Aging provide consumer information about reverse mortgages. The ABA passed a resolution supporting Reverse Mortgages in August of 1995.