14 Important Reverse Mortgage Facts

Many people are aware of reverse mortgage loan options due to the ongoing advertising campaigns and celebrity endorsements of these products.

But do you know your reverse mortgage facts?

With all of the buzz about retirement financing options today, it can be difficult to distinguish between complete and incomplete information about the reverse mortgage products available. Are they safe? How does the government fit in? Are they for low income households only?

reverse mortgage facts

Your home is precious. Get the facts about reverse mortgages.

Here are 14 reverse mortgage truths worth noting if you’re thinking about taking this type of loan for your retirement years.

1. Fact: Reverse mortgages are used by all kinds of people for all kinds of reasons

Reverse mortgages are not for any particular income level or household type. The primary borrower must be 62 years old, and must have enough home equity to qualify. There will also be a financial assessment to determine that the borrower is fit to uphold the requirements of the loan.

But reverse mortgages can and have been used by many different types of households, from high net-worth couples and individuals who are riding out market swings that are impacting their other investments, to families that do need additional monthly cash flow to help make ends meet.

There’s no one reason to take a reverse mortgage, and there’s no one person for whom the loan is the “right” option.

2. Fact: You own the home when you have a reverse mortgage

Many people erroneously believe that the bank or the government takes your home when you get a reverse mortgage.  That’s simply not true. Reverse mortgage borrowers hold the title to their homes throughout the entire course of the loan.

Once the loan becomes due and payable due to an event such as the borrower passing away or moving, the borrower or his or her heirs will be responsible for repaying the loan. Often, this is done through sale of the home — and you never owe more than the value of the home when the loan comes due.

3. Fact: Your heirs have options

Although it’s often the case that heirs sell the home to repay the loan, that is not their only option. In the case where a borrower has passed away, heirs are entitled to pay off the reverse mortgage through whatever means they choose.

If they are able and wish to repay the loan with outside funds and keep the home, that’s up to them to decide.  Learn more in, ” What Happens When a Reverse Mortgage Comes Due?

Furthermore, it is important to note that research indicates that most families would rather get a reverse mortgage than lose independence or compromise their quality of life.

4. Fact: It’s likely to reduce your net worth

A reverse mortgage is a loan that allows a borrower to take from the home equity he or she has amassed over time. Once this money is spent, the home holds less value. There is also interest that accrues and must be repaid when the loan comes due. Because of this, a reverse mortgage is likely to reduce your net worth.

However, if you get a reverse mortgage but do not use the loan proceeds and simply keep them in a line of credit.  It is possible that a reverse mortgage could improve your net worth.

5. Fact: The loans are growing in popularity

Three trends are making reverse mortgages more popular than ever before: 1)  Americans have not saved enough. 2) Housing values are at all time highs. 3) The HECM Reverse Mortgage has had many recent modifications to make it a safer product for seniors.

6. Fact: Timing when to get a reverse mortgage can mean more money for you

When there are low interest rates and high housing prices, it can be a good time to get a reverse mortgage. However, the decision to get a reverse mortgage should be part of your lifelong financial plan and not be done on a whim.

7. Fact: Reverse mortgage TV ads are confusing

A recent study by the Consumer Financial Protection Bureau found that most reverse mortgage TV ads are misleading or confusing.  Reverse mortgages are somewhat complicated and it is important to understand fact vs fiction.  Here are the truths behind the ads.

8. Fact: A reverse mortgage is usually is less financially efficient than downsizing

Drawing on your home equity is one option to free up home equity in retirement, but downsizing is another popular choice. By selling your home and relocating to a smaller property, you may see more financial efficiencies than if you were to take out a reverse mortgage on your existing home. However, if staying in your current home is your goal, a reverse mortgage may be an option worth considering.

9. Fact: There are different payment options for your reverse mortgage

Most people are familiar with the “lump sum” option for receiving reverse mortgage proceeds. In fact, the lump sum reverse mortgage has lost popularity in recent years due to changes to the government-insured Home Equity Conversion Mortgage program. Today’s borrowers are more often taking their reverse mortgages as credit lines, or under term or tenure payment plans.

10. Fact: There are upfront costs on a reverse mortgage

Like any home loan, borrowers face upfront costs including a mortgage insurance premium, an origination fee paid to the loan originator, appraisal fees, counseling fees, and additional closing costs such as title and notary fees. The origination fee for HECM loans is capped, but it’s a good idea to ask what these potential fees are likely to total in advance of paying them.

11. Fact: Most reverse mortgages (not all) come with a government guarantee

The vast majority of reverse mortgages are taken out as HECM loans under the government-insured program. There are also private reverse mortgages available through lenders that may offer some additional benefits to borrowers, such as the ability to borrow a higher level of home equity. Ask a reverse mortgage specialist for details.

12. Fact: Home equity is the biggest source of wealth for half of Americans

A recent report published by the Brookings Institution citing a 2014 Federal Reserve finding that “Home equity is an important source of wealth for middle income households, accounting for more than one-third of total net worth for the second, third, and fourth quintiles of the net worth distribution.”

Home equity may be your biggest asset, and therefore, your most viable option for financing your retirement. A reverse mortgage is one way to tap into this home equity.

13. Fact: There’s more than one type of reverse mortgage

Reverse mortgages are not limited to the HECM type, nor are they strictly loans used to remain in the home you currently own.

If you are looking to get a reverse mortgage and purchase a new home all in a single transaction, contact a reverse mortgage specialist to learn more about the HECM for Purchase program. Just like there are different problems facing many households, there are different reverse mortgage types to help solve them.

14. Fact: There is no right decision

Getting a reverse mortgage is not for everyone. Like most things, the decision to get a reverse mortgage — or not — is entirely subjective.  There are many different personal factors to consider.  If you are unsure whether the loan is right for you, you might consider using the reverse mortgage suitability quiz and learning more about suitability in, “How to Assess Your Suitability for a Reverse Mortgage.”

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