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June 12, 2014
Despite hundreds of thousands of older Americans taking out reverse mortgages and surveys showing that these retirees are happy with the results, some people still have a strong distaste for them.
In nearly every case, if you dig a little deeper, much of the hatred for reverse mortgages comes from misunderstanding or lack of knowledge about the product. Here are some of the top reasons why people might hate reverse mortgages—and some counterpoints to consider as well.
Fear of the unknown
If you don’t know how a reverse mortgage works but you have heard it has a bad rap, you may dislike it purely by instinct – things that are new or confusing are often rejected. But rather than knock something you haven’t learned about, here are some facts to help you understand reverse mortgages.
Most reverse mortgages are obtained via the federally-insured Home Equity Conversion Mortgage (HECM) program. Homeowners age 62 and older can borrow against the equity they’ve built up in their homes in the form of a loan. HECMS are non-recourse, meaning you’ll never have to pay more than what your home is worth at the time of sale, even if your loan balance ends up exceeding the value of the home.
While there are some requirements of borrowers—including remaining current on homeowners insurance, property tax, and home maintenance—you’re free to use your loan proceeds however you see fit.
Reverse mortgage myths
There are a couple of reverse mortgage “myths”—common beliefs about the loan that aren’t founded in facts.
Those myths include:
One of the biggest misconceptions around reverse mortgages is that the bank will own your home if you get a reverse mortgage. This isn’t true at all. When a homeowner takes out a reverse mortgage, he or she retains the title to the home, just like in a traditional “forward” mortgage.
Reverse mortgages don’t become due and payable until the last surviving borrower dies or leaves the home. As long as you fulfill certain requirements related to taxes, insurance, and upkeep, you won’t get kicked out of your home.
While reverse mortgages do need to be repaid (which is often accomplished by selling the home), that’s not your only option. If adult children have a sentimental attachment to the home, or want to keep it in the family, heirs have the option of repaying the reverse mortgage through other means available to them. And if the home is sold to pay off the loan, there is often some money from the sale that is still inherited by your heirs.
Adult children want an inheritance
Many adult children don’t like the idea of their parents borrowing against their home equity because those children want to receive an inheritance. While it’s true that heirs will be responsible for repaying the loan once their parents pass away, there are a couple of factors to keep in mind.
Reverse mortgages insured by the Federal Housing Administration are non-recourse, which means adult children will never have to pay more than the home is worth at the time of sale.
“When a reverse mortgage becomes due and payable as a result of the borrower’s death and the property is conveyed by will or operation of law to the estate or heirs, that party (or parties if multiple heirs) may satisfy the HECM debt by paying the lesser of the mortgage balance or 95% of the current appraised value of the property,” explains reverse mortgage group the National Reverse Mortgage Lenders Association in its consumer Guide to Reverse Mortgages.
Adult children should also realize that there might be money left over after their parents take out a reverse mortgage. If the borrower’s heirs decide to repay the loan by selling their mom or dad’s house, any money left over after paying off the loan goes to the heirs.
Reverse mortgage fees
A reverse mortgage has fees that are similar to any other loan insured by the Federal Housing Administration. These include an initial mortgage insurance premium of 0.5% or 2.5% depending on the amount you take out. In addition, over the life of the loan you will be charged an annual mortgage insurance premium of 1.25% of the mortgage balance.
These fees all go to insure your loan and make sure you always have access to any remaining funds, even if your lender goes out of business. It also provides the non-recourse guarantee, which means you will never owe more than your home is worth at the time of sale.
In addition to the fees that borrowers pay to the Federal Housing Administration, there are standard title, taxes, and lender fees that vary depending on the provider. The good news is that lenders are not allowed to charge an origination fee more than $6,000 according to the Department of Housing and Urban Development, the agency that manages the program.
Loan balance that grows
Some people might not like reverse mortgages because they are a negatively amortized loan, which means that the loan balance grows over time. This is different than a traditional mortgage, which sees its loan balance get smaller as borrowers make payments each month.
Since borrowers pay for mortgage insurance, the threat of the loan balance growing too high is minimized because borrowers are protected if the loan balance ends up being more than the home is worth.
While every situation is different, a survey from AARP found that nearly 90 percent of people over age 65 want to stay in their residence for as long as possible. AARP also reported that 93 percent of borrowers said their reverse mortgages had had a mostly positive effect on their lives, compared to 3 percent who said the effect was mostly negative.
A reverse mortgage might not be the right fit for each person, but it’s time people start realizing it’s a safe way to enable older Americans to remain in their homes and live a comfortable retirement.
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