Charles Guy Stidham III
Common Reverse Mortgages Myths & Misconceptions
HECM reverse mortgages are Federal Housing Administration-insured products and are heavily scrutinized by regulators and legislators looking to protect seniors' best interests. However, there is still a wide range of Myths and misinformation that exist about these unique loans.
You may find a great deal of information both online and offline about reverse mortgage.
I have compiled a list of misconceptions with explanation to help you better understand the reverse mortgage. These can be used to assist you when deciding if a reverse mortgage is the best decision for you.
Reverse Mortgage Questions And Answers
Are you a person 62 or older who lives in their home, doesn't want to move but doesn't want a monthly payment? If so, read below as some "real world" questions are discussed about a Home Equity Conversion Mortgage or better known as reverse mortgage.
There was a time when reverse mortgages were not regulated. They are now regulated by the Federal Housing Administration (HUD) and backed by the full faith and credit of the United States government. Here are the basics of what to know about qualifying for a reverse mortgage:
Basic Eligibility Requirements
- 62 or older
- Single family home, two to four family residence, FHA-approved condo, or an FHA-approved manufactured home
- Any existing mortgages must be paid in full to obtain HECM funding
- If a reverse mortgage is used to purchase a home, have to prove you can cover the down payment
- Must meet modest credit requirements
Now let's try and clear up some misconceptions about Reverse Mortgages
Myth: On a reverse mortgage the lender can take my home?
Fact: That is absolutely false. You can stay in the home as long as you want to. If you live longer than expected (sorry but that is a realistic statement) then the balance remains on the home even if it exceeds the value of the home and you can stay in the home.
Myth: If I owe more on the home than it is worth when I pass away my heirs/children have to cough up the money so the house can be sold?
Fact: Absolutely false!!!! For example if your house is worth $300,000 and the balance on your reverse mortgage is $385,000 the estate has no liability whatsoever for that balance. The home simply goes back to the lender and the estate has no recourse at all.
In addition if for some reason the home has been in the family for many years and one of the heirs would like to purchase the home but doesn't want to pay the balance owed because it is more than the house is worth, if there is a reverse mortgage on the home there is a provision mandated by the federal government that the heir(s) pay only 95% of the market value. So, in this example if the house is worth $300,000 then the heirs would buy the house for $285,000.
Myth: As soon as I pass away my spouse is evicted and thrown out on the street?
Fact: That's not true. Once a spouse (legally married) has passed the lender will verify the age of the remaining spouse and as long as that spouse is over 62 then the reverse mortgage stays in place and the spouse stays in the home.
Myth: As soon as the homeowner dies the lender immediately takes over the home and the heirs don't have a chance to sell it?
Fact: Once the homeowner(s) passes away the estate/heirs have exactly 6 months to sell the home and can request an additional 6 months extension if the heirs can show that the home has been listed for sale. After 12 months from the date of the homeowners passing, yes the home will then revert back to the lender. Honestly speaking if the home doesn't sell in 12 months then there is something wrong with the house.
Myth: My balance will balloon too high and I won't be able to leave any equity in the home to my heirs?
Fact: This is absolutely false. If a home owner chooses to make the interest payment on the reverse mortgage so that the balance doesn't increase then that is 100% permissible. For example if a homeowner is 71 years old and current has a regular mortgage with a $1,491 monthly payment and a $200,000 balance; they can refinance to a reverse mortgage and the monthly payment would be $1,137.50 IF they want to make that payment and keep the balance at $200,000. However it is very important to note that a reverse mortgage does not require a monthly payment to be made!!!!!
Myth: I own my home free and clear and want a lump sum of $75,000 after closing on my Reverse Mortgage. I am afraid my balance will be $275,000 after 10 years?
Fact: If you borrow $75,000 today based upon current interest rates between 4% and 4.5% after 10 year years you will owe approximately $113,000 on your home.
Myth: I owe nothing on my home and if I get a reverse mortgage that pays me $1,500 per month my home will have a balance of $300,000 in 5 years?
Fact: Not true. If you own your home free and clear and you obtain a reverse mortgage that pays you $1,500 per month at the end of 5 years you will around $100,000.
Myth: If I stop my reverse mortgage then the existing balance stops growing?
Fact: Not true. If you get a reverse mortgage and are not making monthly interest payments the loan balance still will continue to grow and expand.
Myth: All reverse mortgages have adjustable interest rates that can move up or down?
Fact: That's not true. You can choose a fixed interest rate on your reverse mortgage so that the rate cannot move up or down.
Myth: I am forced to have taxes and insurance in my mortgage and cannot pay them separately?
Fact: Having your taxes and insurance paid through the mortgage is based upon a number of factors but most notable YOUR financial health. If you property taxes are in arrears and behind and haven't been paid then yes, more than likely they will be caught up through the reverse mortgage process and then paid as part of the loan. And at the end of the day if that is the case then everybody wins: you get current and the state of Texas continues to be able to provide vital services to its citizenry because you are paying your taxes.
A few more discussion points
Seniors (62 and older) are classically trained by their parents to pay off their home and own it free and clear. As the owner or Mortgage of Texas and Financial I could not agree more with that sentiment. But, times have changed and houses are worth a WHOLE LOT MORE than the homes your parents lived in. Your parents lived in homes that might have cost $12,000 and were worth $50,000 when they passed. Your home might be worth $300,000 or more in today's market.
If you are older than 62 and have a current "regular" mortgage and there is a substantial amount of equity in your home, then maybe you should consider a reverse mortgage. This way you don't make a mortgage payment and can put that money you usually spend on your mortgage payment into savings account for future medical expenses or you can use it to do more traveling or maybe even setting up a college fund for the grandkids.
Recent and Actual Loan Scenarios of Reverse Mortgage Loans I have Closed
We closed on the reverse mortgage and gave the homeowner $75,000 extra to pay cash for the additional land near her vacation home. The homeowner was adamant about the balance not going higher over the coming years on their reverse mortgage. So I suggested that she pay the monthly interest and MIP payment each month. The new monthly payment was $687 and she now owns the additional land and is only paying $75 more per month than her previous mortgage payment. Plus during the Christmas months she doesn't have to make any payment at all because it is a reverse mortgage. There is no required monthly payment on a reverse mortgage.
Between the home equity loan payment, credit card payments and a car payment the borrower was paying almost $1,800 per month and it was barely leaving them any money to enjoy life.
We closed on a reverse mortgage, paid off everything and gave them enough cash to buy a new car. Once again the borrower was adamant about the balance not going up. So now her monthly payment is she elects to make one is $315. That means the household has almost $1,500 more per month to live on and enjoy the rest of their lives with the balance going up.
By turning 62 years of age we don't just miraculously turn into financial geniuses and start making unbelievably wise financial decisions. The same bad financial decisions that might have plagued us as youngsters (anything before age 62?) unfortunately seem to sometimes creep into the "golden years".
Do not let fear and misinformation lead you into a situation where you can't even go out to dinner or get yourself a "mani/pedi" because the credit cards, home equity loan and car payments are taking all of your retirement pay and/or social security income. Let a professional with 25 years' experience in the mortgage business help you make a wise decision.