Misconceptions about Reverse Mortgages

Because of some bad actors from the past who offered a similar product, some myths and misconceptions about reverse mortgages have developed over time.

It’s important that people know laws and regulations have changed to protect homeowners and Reverse Mortgages are safe, so they can determine if this is the right product for them and their families.

Again, how does Reverse Mortgage Work?

A reverse mortgage is a tool available to people over the age of 55 to provide financial flexibility in retirement and income security. A reverse mortgage allows you to access up to 55% of your home’s value in cash, tax-free.

One of the primary benefits of a reverse mortgage is that there are no regular principal or interest payments required. Interest is added to the balance, and you only need to pay the balance when you stop occupying the home. The proceeds normally won’t impact the government retirement benefits you’re receiving, and the proceeds are tax free(it is not considered as income).

Some of the Myths Associated with Taking Out a Reverse Mortgage

Despite the amazing power of reverse mortgages to provide financial flexibility to 55+ homeowners and their families, still there are numbers of misconceptions about this product remain. These are a few examples:

Myth 1: You No Longer Own Your Home

Some people are afraid they will lose ownership of their property if they take out a reverse mortgage.

However, the opposite is true. A reverse mortgage allows you to access up to 55% of the value in your home, while retaining 100% ownership. This is true no matter how long you stay in your home, or what happens to home prices. Your home is yours.

Myth 2: You May Owe More than What Your Home Is Worth

Because of the Non-Recourse Loan, if you take out a reverse mortgage, you and your family will never owe more than the fair market value of your home at the time you leave the home. If the mortgage balance were to ever exceed the home value, the lender absorbs the loss. But the best part is, if your home price goes up, you keep that value.

Myth 3: Your Children Will Lose the Family Home

While the mortgage does become payable when you move or pass away, your estate retains ownership of the home. This means your children would always have the opportunity to refinance the mortgage or pay it off another way. The bottom line: your family is in control.

Myth 4: There Will Be No Equity in the Home to Give to Your Heirs

When a reverse mortgage is paid off, borrowers or their children still keep the equity in the home. While the loan balance grows over time, in a rising home price environment (real estate appreciation), so does the home value. This means that in a large majority of cases, there is still considerable equity in the home to form part of the inheritance reverse mortgage customers leave to their heirs.

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The Reality of Reverse Mortgages

Let’s summarize the realities of reverse mortgages:

The “Non-Recourse Loan”

A reverse mortgage comes with a Non-Recourse Loan guarantee. This is a promise that a borrower will never owe more than their property’s fair market value in cases where real estate prices drop, and/or the loan balance exceeds the value of the home.

A Reverse Mortgage Gives Peace of Mind

Many borrowers like reverse mortgages because they are “set it and forget it”. As long as you keep up with your property obligations, like paying your property taxes and insurance, and keeping your home in good repair, you will never have to make a payment on the mortgage during the loan term, and you can stay in your home as long as you want.

Other products such as HELOCs come with “loan to value caps,” meaning if the loan balance exceeds a certain limit, you will be forced to sell your home and repay the balance. That will never happen with a reverse mortgage.

Home Equity Can Continue to Grow

Some people worry that the balance on a reverse mortgage will eat into their home’s equity over time. However, as long as real estate prices continue to increase, home equity can also continue to grow alongside the mortgage balance.

Tax-Friendly

Reverse mortgage proceeds are treated favorably from a tax perspective. Unlike selling investments from your retirement portfolio to fund expenses, which usually comes with capital gains tax, according to the IRS, reverse mortgage payments cannot be taxed as they are considered the same as loan advances from a traditional mortgage(it might be beneficial to get reverse mortgage by staying in lower tax bracket, consult with your accountant).

The Demand for Reverse Mortgages Is on the Rise

The demand for reverse mortgages is growing rapidly, for a few reasons. First, home prices have risen considerably in the past number of years, meaning many 55+ are realizing just how much wealth they have in their homes. Second, interest rates on reverse mortgages are comparable with conventional interest rates. Lastly, thousands of Americans are beginning to realize that their prior misconceptions about reverse mortgages are wrong and are beginning to see the power of this product to transform their lives in retirement.

A Financial Benefit

When you realize all the benefits of taking out a reverse mortgage, you will see how it can be a beneficial to anybody who’s eligible who wants to make the most out of their retirement years.