The Home Equity Conversion Mortgage or HECM (heck´-um)—also known as a Reverse Mortgage—is a safe and increasingly common retirement income tool that can effectively improve your cash flow and help your assets last longer.
With a traditional mortgage, the homeowner pays down the debt over time. But with a reverse mortgage, the loan balance grows over time because the homeowner isn’t making monthly mortgage payments.
Despite its recent growth in popularity, there are still many misconceptions about the program, both in the media and through word-of-mouth from friends and family. Sadly, this keeps people from considering this helpful financial tool—and enjoying the peace of mind that a reverse mortgage can offer homeowners aged 62 and over.
So, with all the misinformation out there, how can people decide whether a HECM is right for them? To help our clients separate fact from fiction, we compiled a list of reverse mortgage myths and truths to help them better understand today’s HECM program.
MYTH #1: The lender or government will own my home.
FACT: Actually, the program was designed to help older homeowners stay in their homes longer—you or your estate will retain ownership of your home’s title. The lender’s interest is limited to the outstanding loan balance as a lien on the property.
MYTH #2: Getting a mortgage means that I’ll have to make monthly payments.
FACT: With a reverse mortgage, there are never any required monthly payments. As the borrower, you’re only responsible for paying property taxes, insurance, and applicable HOA dues, and keeping the home in good repair according to HUD guidelines. You can make payments on a reverse mortgage if you choose, but that is entirely voluntary.
MYTH #3: My children will be responsible for repaying the loan.
FACT: A reverse mortgage is a “non-recourse” loan—which means you or your heirs will never owe the lender more than the home is worth at the time of its sale. If you leave your house to your heirs as an inheritance, the loan must be repaid—again, most often this can be done by simply selling the home and using the proceeds to pay off the loan. This way, even if the loan balance exceeds the value of the home when the loan is repaid, your heirs won’t have to cover the difference. That’s one of the protections supplied by government-insured reverse mortgages. If your heirs don’t want to sell the home, they could pay off the loan, using other sources of funds. Or buy the home for 95% of the current appraised value.
MYTH #4: I can’t get a reverse mortgage, because my current mortgage isn’t paid off.
FACT: If you have enough equity in the home, you can have a mortgage or other debt on your home’s title and still qualify. In that case, the proceeds from the reverse mortgage must first be used to pay off the existing mortgage or debt. In fact, many clients get a reverse mortgage specifically for this reason—to get rid of monthly mortgage payments on their current mortgage.
MYTH #5: Reverse mortgage lenders really just want to sell your house.
FACT: You can stay in your home for as long as you want, as long as you meet the terms of the loan. If you decide to sell the home or move out, the loan will then become due.
MYTH #6: If I get a reverse mortgage, I’ll have nothing to leave my kids.
FACT: It’s possible that the value of your property may grow over your lifetime. At the same time, interest will accrue on the outstanding loan amount and be added to the balance. If there’s equity left over after the loan is repaid (usually from the sale of the home), it may be available for you to leave to your kids1.
MYTH #7: If I get a reverse mortgage, I can’t sell my home.
FACT: A reverse mortgage is like any other loan; if you sell your home, that reverse mortgage will be paid off at closing. There are no penalties for paying off the loan or selling the home in advance.
MYTH #8: If my lender or servicer changes, my loan terms can change.
FACT: The terms of the loan are defined at closing and by law cannot be changed, as long as the deeds remain in force.
The first step to unlocking financial freedom in retirement begins with a proactive approach to financial planning. A reverse mortgage can be part of that plan—but it’s not for everyone, and there are many factors that determine if a HECM is a good fit for you.
Getting started is simple. To find out if you qualify for a reverse mortgage program, and decide if it’s right for you, contact me to explore your options. The experts at Watermark Capital Inc. can answer your questions and help you make an informed choice.
To learn more about a reverse mortgage, such as how I can live more comfortably in my retirement years, or what it might mean to your inheritance, explore my website.
1. Consult amortization tables for details. Property value and ending loan balance are subject to change. There is no guarantee that there will be equity left over for heirs.
