5 myths of a reverse mortgage
March 18, 2023
A reverse mortgage is a term you may or may not be familiar with. The formal name is a Home Equity Conversion Mortgage (HECM). Simply put, it reverses the equity in your home to cover expenses.
To understand how it works, it is easiest to compare to a standard mortgage which would be considered a "forward mortgage." In a forward mortgage you make a payment every month. Part of the payment covers the interest charges and part of the payment reduces the balance of your loan, increasing your home equity.
A reverse mortgage would work just the opposite. Every month the equity in your home makes the payment, part of it covers the interest and the other part is an increase in your loan balance, decreasing the equity you have in your home. To fully understand the benefits, it is important to work with a well-informed Reverse Mortgage Specialist, but below are a few myths I cover in every Reverse Mortgage Consultation session I have:
1. The bank will own your home: No different that a forward mortgage, you still own your home. The bank just has a first position lien on your home the same as a typical mortgage.
2. Your heirs will not inherit your home: The home is still your home and you can pass it along to whomever you would like to. The person who is set to inherit your home will have three choices. Work with a licensed loan offer to refinance the balance into their name with a loan program they qualify for; sell the home and retain any profit or remaining equity netted from the sale; or walk away with no liability whatsoever because it is a "non-recourse" loan, which means a borrower or their estate will never owe more than the balance or value and no other assets can be used to repay the debt. This offers a protection for the heirs who may not want the obligation.
3. You cannot stay in your home forever: A reverse mortgage (HECM) is designed to allow you to age in place for the rest of your life without ever having to move. As long as you maintain the home and ensure the property taxes and insurance are paid current and meet any other obligations of the loan, you will not be evicted or foreclosed on. If you the homeowner fails to meet the obligations of the loan, as with any loan, it can trigger a default process that could result in foreclosure and sale of the home.
4. Government benefits can be affected: Entitlement programs, such as Social Security or Medicare, are not usually impacted by a homeowner obtaining a reverse mortgage, but income or needs based programs can possibly.
5. A home equity loan is better: With a standard home equity loan, the homeowner will have a monthly expense obligation that they will have to qualify for. In a reverse mortgage, a homeowner will not have a monthly payment. Qualifying is not based on income but on the equity in the home and birthdate of the youngest person on the loan. A homeowner must be at least 62 years of age to be eligible for a reverse mortgage. A reverse mortgage will typically also have a lower interest rate over the course of the loan and, like a regular forward mortgage, can be refinanced to lower interest rate or access more equity.
A reverse mortgage is a specialized product that requires an approved counseling session and an advisor that can explain the pros and cons of a reverse mortgage. This could be the ideal way for an aging homeowner to be given the resources and assurance that they can live in their own home for the rest of their life and provide the same protection to a spouse after passing.
Alysha Boles is a Mortgage Loan Advisor and Debt Strategist that specializes in both the planning, pre-approval and loan process of mortgage lending. Licensed in California and Texas and the ability to connect you with a licensed professional in all 50 states. She can be reached at (661) 858-7214, or inquire online at http://www.advisoralysha.com.