- Have you heard about reverse mortgages, but aren’t quite sure if they’re legitimate or a scam?
- Are you wondering if one is right for you or an older homeowner you know?
Also known as Home Equity Conversion Mortgages (HECMs), reverse mortgages have become increasingly popular in recent years. As a result, many misperceptions have sprung up.
Reverse mortgages can be a useful financial tool for older homeowners, but they’re not for everyone. Before considering one of these loans, it pays to know the myths and facts.
Myth #1: A reverse mortgage works the same as any other type of home loan.
A reverse mortgage is a special 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.
Please give us a call at 888-383-8885 to obtain a copy of housing counseling booklets Use Your Home to Stay at Home™ and Preparing for your HUD counseling session for additional vital information on the reverse mortgage process.
Myth #2: Most reverse mortgage borrowers use their loan funds for vacations and other fun things.
The truth is that most borrowers today use their loans for immediate needs, such as paying off their existing mortgage or other debts.
About 33% of homeowners who consider these loans want to supplement their monthly income, so they can afford to continue living in their own home longer.
Myth #3: 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 HECM Standard reverse mortgage also must pay an upfront FHA mortgage insurance premium that can be as much as 2% of the value of their home. But 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 new SAVER HECM 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 loan.
Myth #4: 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 reverse mortgage. Find out if you may qualify for help with expenses such as property taxes, home energy, meals, and medications at BenefitsCheckUp®.
To perform a benefits checkup online, click here.
Myth #5: 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 have a fund for emergencies and 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 #6: 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. This 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 HECM 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 HECM, 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 #7: 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 HECM 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 #8: Most reverse mortgage 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.