Bernadette Collins, a Reverse Mortgage Loan Originator with Associated Mortgage Bankers, kindly provided us with some myths and facts about reverse mortgages. If you have any further questions you can contact Bernadette at 631-365-9068 or by e-mail: bcollins@ambmortgage.com
Myths about Reverse Mortgages
Have you heard about reverse mortgages, but aren’t quite sure how they work? 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 misconceptions have sprung up. Reverse mortgages can be a useful financial tool for older homeowners, but they are 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.
Fact: 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. The amount you are allowed to use is based on the younger homeowner’s age. 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. Any unused portion of the credit line grows every year – greatly increasing your borrowing power in the future. (You must maintain homeowners insurance and property taxes on an annual basis)
Myth #2: The Bank will take your home
Fact: You must occupy the home as primary residence and the deed remains in your name, until the last living borrower dies, sells the home or has to move into a nursing home for more than twelve months.
Myth #3: Most reverse mortgage borrowers use their loan funds for vacations and other fun things.
Fact: 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 #4: Reverse mortgages are too expensive.
Fact: 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. These costs are included as part of the reverse mortgage loan. The new SAVER HECM reverse mortgage is less expensive because it eliminates the upfront insurance fee; however, borrowers receive a smaller loan amount with a HECM Saver.
Myth #5: Reverse mortgages should only be used as a last resort.
Fact: 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.
Myth #6: Most people who take out a reverse mortgage are elderly widows.
Fact: 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 #7: Reverse mortgage counseling is a waste of time.
Fact: To be certain you understand all aspects of a reverse mortgage, the government requires that you undergo an independent, unbiased counseling session with a U.S. Housing and Urban Development (HUD) approved counselor. This can be done in person or over the phone.
