Reverse Mortgage Myths and Realities
Reverse mortgages have changed dramatically over the years. Jill Waldrop in Phoenix, AZ, is committed to helping adults over the age of 62 navigate these loans and understand the entire process.
Although simple in concept — converting a portion of your home equity into cash — certain myths and misinformation have sprung up around reverse mortgage loans. Here we address a handful of these common mistruths:
Myth: The bank owns my home.
No. When taking out a reverse mortgage loan, you retain title to the property as long as you meet the loan guidelines and requirements, such as maintaining the property and paying property taxes and homeowners insurance. The lender puts a lien onto the title to ensure repayment of the loan. This is the same for a traditional mortgage.
Myth: I cannot get a reverse mortgage loan if I have an existing mortgage.
No. You just need sufficient home equity for the loan to make sense.
Myth: I’m not eligible because I don’t have enough income.
No. You don’t have to earn a certain amount of money. Rather, you need to show you have the financial ability and willingness to pay your ongoing property taxes, home insurance, and other property-related expenses.
Myth: The lender receives whatever money remains after the home is sold to pay off the reverse mortgage.
No. Any leftover funds go to the heirs or the estate upon their request.
Myth: If you take out a reverse mortgage loan, your children won't be left with any of the home equity.
While the amount of equity typically decreases over time with a reverse mortgage, it doesn’t mean there will be no equity left when the last borrower dies. There are several factors that go into how much equity may be left, such as home appreciation, length of the loan, and optional monthly payments. There could still be equity left for your children.
Myth: Your children will be responsible for repaying the loan when you die.
A reverse mortgage is a non-recourse loan, meaning that the lender can only be repaid from the proceeds of the sale of the home and not more than the value of the home. That means even if the home decreases greatly in value, the maximum repayment amount can only be up to the value of the home. Your heirs are not directly responsible for the loan repayment. However, they have the option to refinance the loan and retain the property.
Myth: You must have your first mortgage paid off before you can be eligible for a reverse mortgage.
No. While any existing debt on your home's title must be paid off at closing and you must have adequate equity in the property, it is not required that you own your home "free and clear" before applying for a reverse mortgage.
Myth: You are not allowed to sell your home if you have a reverse mortgage.
No. You can sell your home anytime. At the close of the sale, you would pay off your reverse mortgage at closing. There are also no prepayment penalties if you choose to pay off your loan early or make loan payments.
