Over the years, there have been many misconceptions and an overall lack of understanding about what reverse mortgages are, and how you can use them.
At Watermark Capital Inc., we’re committed to educating consumers about the many uses of this powerful financial tool. So, we created this helpful MythBusters section to help you separate fact from fiction. Read on to learn the truth about some of the most common reverse mortgage myths and misconceptions.
With a Reverse Mortgage, the bank takes your home. That is a MYTH: You own your home. Not the bank or lender. Lenders are not in the business of owning homes – they wish to make loans and earn interest. The homeowner keeps the title to the home in their name, as long as they keep current with property taxes, insurance, HOA dues if applicable, and home maintenance. In the exact same manner as a traditional mortgage lender, the Reverse lender adds a lien onto the title. This guarantees that the lender will eventually get paid back the money it lends when the loan is paid off or when the last borrower dies or vacates the home.
Since you have signed away your home, your heirs will not inherit the house. This is another MYTH. Your heirs will inherit the home just as they would with any other mortgage, paying off the loan balance with the remainder going to them. When the loan comes due, they can decide what to do to repay the loan balance. They can:
If you get a Reverse Mortgage, there won’t be any equity left for the heirs. This is a very arbitrary statement, with several underlying preconceived notions, which are MYTHS. The amount of equity left to the heirs is a function of how long the borrowers stay in the house, how much of the available funds they use, how their other assets perform in the market, and what the housing market does while they have the Reverse Mortgage. Studies show that strategically using the funds of a Reverse Mortgage to offset downturns in the market affecting other assets can increase the legacy to the heirs1. It is also important to note that the longer the borrowers live, the greater need they will have for funds to live, and the further they will deplete their other assets.
You can be forced out of your home for not paying a Reverse Mortgage. That’s a MYTH: it’s designed to help people stay in their homes. Reverse mortgages were created specifically to allow seniors to live in their home for the rest of their lives. Because the homeowner typically receives money from a reverse mortgage-instead of making payments to a lender-the homeowner can never be evicted or foreclosed upon for non-payment. However, it is the homeowner’s responsibility to maintain the home in good condition, keep property insurance current, and pay property taxes. Even if the home declines significantly in value, a borrower cannot be kicked out of their home.
Reverse Mortgages are only for borrowers who are desperate, to be used as a last resort. That’s a MYTH: a reverse mortgage is a powerful tool-not a last resort. When it comes to reverse mortgage loans, the fact is that they are a powerful financial tool that can be an important part of your overall financial plan. From paying off an existing mortgage to delaying social security, or even creating an emergency line of credit to account for future medical expenses or unforeseen expenses, it’s a flexible product that gives you options. In fact, many financial planners have begun to discuss reverse mortgages with clients who need additional sources of retirement funding.
Can I still be eligible to get social security and Medicare? This is not a myth: those benefits are generally unaffected by a reverse mortgage. Government entitlement programs such as social security and Medicare are not affected by a reverse mortgage-however, need-based programs such as Medicaid may be. To stay eligible for Medicaid, you’d need to manage how much you take from the reverse mortgage per month to ensure you don’t exceed Medicaid limits. Consult a qualified financial advisor or appropriate government agency to learn how a reverse mortgage may impact your eligibility for some government benefits.
The upfront fees and interest rates associated with reverse mortgages are excessive. That’s a MYTH: they don’t require large out of pocket expenses. Mortgage loan origination costs and interest rates are comparable to those of traditional mortgages. There are FHA insurance costs that some traditional mortgages do not require, but they are relatively small. Typically, lender closing costs and fees can be financed into the loan, so there’s little required out of pocket.
Will I have to pay income taxes on my reverse mortgage proceeds? No, paying taxes on the distributions from a reverse mortgage is a MYTH: the proceeds are not considered income, and are not taxable. The money from a reverse mortgage comes from your home’s equity, which already belongs to you, so it’s not considered income. Plus, the interest on reverse mortgage can be tax-deductible when it’s repaid. Consult a financial advisor or an appropriate government agency for any effect on taxes or government benefits.
Footnotes and Additional Articles::
For a deeper dive, see Myths 2.0.
