By Alain Valles, President-Direct Finance Corp.
Although reverse mortgages have been part of the financial landscape for decades, they have taken on increased importance and visibility in the past few years, most recently under the name of Home Equity Conversion Mortgage (HECM). Still, many people do not fully understand the reverse mortgage process and may be carrying some old and misguided ideas about what a reverse mortgage is and how it works.
Here are seven common misconceptions about reverse mortgages.
1. “I could lose my home.” With a reverse mortgage you retain ownership of your home and control of the title. You can remain in your home as long as you wish and cannot be evicted or forced to sell.
2. “My children will have to pay back the loan when I am gone.” A reverse mortgage is a “non-recourse” loan, which means that the lender can only be paid from the proceeds of the sale of your home, if and when you decide to sell. When the home passes on to your heirs, the lender is paid from the proceeds and your heirs retain any additional equity that has accumulated.
3. “I won’t qualify because I have bad credit and I am in poor health.” A reverse mortgage has no income, credit or health requirements. Even a current bankruptcy or pending foreclosure is allowed. The only requirement is that the homeowner be age 62 or older.
4. “I can’t afford to make monthly payments on a reverse mortgage.” There are no principal or interest payments on a reverse mortgage – the lender pays you. You can accept a lump sum payment or tax-free monthly payments.
5. “I won’t qualify because I have a mortgage on my home.” You can still qualify for a reverse mortgage if you have a current mortgage or other debt on your home. Those debts are paid off with the proceeds of the reverse mortgage.
6. “Only someone who is ‘cash poor’ needs a reverse mortgage.” Even if you do not have a pressing need for cash or monthly income, a reverse mortgage can be a terrific estate planning tool. You can invest the income, or you can use the money to purchase a second home, long term care insurance – for any purpose at all.
7. “A reverse mortgage is expensive.” Not necessarily. While a reverse mortgage generally costs more than a conventional loan, it is much less expensive than selling your home, relocating and assuming new monthly expenses. And income from a reverse mortgage is tax free.
A reverse mortgage is not for everyone. But for many homeowners it is an excellent way to access the equity that has built up in your home without taking on additional debt or selling your home. The strict guidelines and protections built into the HECM/reverse mortgage programs by the federal government and adhered to by FHA-approved lenders make it a safe and secure process, and well worth investigating.
