Home Equity Conversion Mortgage (HECM) reverse mortgage loans are often misunderstood — but, in the right circumstances, they can be an ideal way for seniors (ages 62+) to create a stable financial future.
So, let us help dispel some of the confusion. Here, we’ll address ten common misconceptions associated with reverse mortgages — to help you sort the truth from the myths.
TRUE OR FALSE: Age 62 is the earliest age at which a person who is the sole owner of a home can enter into a HECM reverse mortgage.
TRUE. A HECM reverse mortgage (which is insured by the Federal Housing Administration or FHA) allows homeowners who are over the age of 62 to tap into the equity they’ve built up in their home.
TRUE OR FALSE: If the value of your home has grown since you bought it, entering into a reverse mortgage would result in a taxable gain to the homeowner.
FALSE. Proceeds from a refinance are not generally a taxable event if the proceeds are less than $100,000. Contact a tax professional to discuss your specific situation.
TRUE OR FALSE: Under a reserve mortgage, the homeowner generally is not required to repay the loan until he/she stops using the home as their primary residence.
TRUE. With a reverse mortgage, you maintain ownership of your home and are not required to repay the loan — as long as you occupy it as your primary residence, pay your property taxes and insurance, and maintain the property according to the FHA requirements.
TRUE OR FALSE: You cannot enter into a reverse mortgage unless your home is completely paid off and there is no outstanding mortgage balance.
FALSE. If you have an existing mortgage on your home, you can still qualify for a reverse mortgage. However, you will need to pay off the existing mortgage with the reverse mortgage, your own savings/funds, or a financial gift from a family member or friend.
TRUE OR FALSE: One downside with a reverse mortgage is that if the home goes under water (the home is worth less than the amount still owed to the lender), the homeowner, estate, or heirs need to pay off the additional debt.
FALSE. In this situation, if you were to sell your home and the proceeds were not enough to cover the reverse mortgage, you and/or your heirs would not be held accountable for the balance. Because reverse mortgages are non-recourse loans and are insured by the Federal Housing Administration (FHA), your lender cannot require you or your heirs to pay the difference. In other words, you will never owe your lender more than the amount you borrowed. Instead, the FHA would reimburse your lender.
TRUE OR FALSE: The only currently available form of payment from a reverse mortgage is a simple lump sum cash distribution.
FALSE. With a reverse mortgage, you may access the equity in your home through a lump sum, a fixed monthly payment, or a line of credit.
TRUE OR FALSE: The amount of money that you can borrow for a reverse mortgage depends on the age of the youngest borrower or eligible non-borrowing spouse, the current interest rate, and the value of the home.
TRUE. All three of these factors will determine the amount.
TRUE OR FALSE: A reverse mortgage is different from a traditional mortgage in that the homeowner is not responsible for any property taxes or insurance payments.
FALSE. Like a conventional mortgage, you are responsible for paying property taxes, homeowner’s insurance, maintenance, and related taxes. In the case of a condo, townhouse, or planned unit development (PUD), the homeowner is also responsible for the monthly, quarterly, and/or annual assessments.
TRUE OR FALSE: Generally, using a reverse mortgage early in retirement to support a retirement plan is better than using it as a last resort toward the end of retirement.
TRUE. If you plan to stay in your home for the foreseeable future and are interested in using a reverse mortgage to create financial stability during your retirement years, it’s better to start sooner rather than later.
TRUE OR FALSE: Because of concerns about poor money management and financial elder abuse, the government has restricted the use of reverse mortgage proceeds to health care expenditures, long-term care costs, home improvements, and tax payments.
FALSE. There are no restrictions on what the proceeds from a reverse mortgage can be used for; however, if you are purchasing another financial product like an annuity or insurance product, you must disclose this, and you must be provided with an analysis of the suitability of using the cash for insurance-type products. (This is because your equity can be “annuitized” by taking a tenure payment from your reverse mortgage.)
Now that you understand a bit more about HECM reverse mortgages, it could be the ideal time to learn more about this loan option — especially if you have someone in your life who is 62 or older and who may benefit from it.
At Waterstone Mortgage, we help seniors explore whether a reverse mortgage is ideal for their current circumstances and long-term goals. Because reverse mortgages are unique, we take the time to answer questions, address concerns, and help our potential clients strategize for the future.
Interested in learning more? Get in touch with a trusted Reverse Mortgage Specialist at Waterstone Mortgage. It’s our goal to help senior citizens create a more financially stable and secure retirement.
This material is not from HUD or FHA and was not approved by HUD or a government agency. The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage (HECM),and is only available through a Federal Housing Administration (FHA)-approved lender. Not all reverse mortgages are FHA insured. When the loan is due and payable, some or all of the equity in the property that is the subject of the reverse mortgage no longer belongs to borrowers, who may need to sell the home or otherwise repay the loan with interest from other proceeds. A lender may charge an origination fee, mortgage insurance premium, closing costs and servicing fees (added to the balance of the loan). The balance of the loan grows over time and you are charged interest on the balance. Borrowers are responsible for paying property taxes, homeowner’s insurance, maintenance, and related taxes (which may be substantial). There is no escrow account for disbursements of these payments. A set-aside account can be set up to pay taxes and insurance and may be required in some cases. Borrowers must occupy home as their primary residence and pay for ongoing maintenance; otherwise the loan becomes due and payable. The loan also becomes due and payable (and the property may be subject to a tax lien, other encumbrance, or foreclosure) when the last borrower, or eligible non-borrowing surviving spouse, dies, sells the home, permanently moves out, defaults on taxes, insurance payments, or maintenance, or does not otherwise comply with the loan terms. Interest is not tax-deductible until the loan is partially or fully repaid. All loan requests are subject to credit approval as well as specific program requirements and guidelines. For some programs, income and property restrictions may apply. Information is subject to change without notice. This is not an offer for extension of credit or a commitment to lend.