Tom Kelly: ‘Reverse Mortgage Myths’
Jul 19, 2011, 11:29 AM | Updated: Mar 4, 2016, 5:59 am
I was in a meeting last week when the subject of reverse mortgages surfaced. One of the participants at the table was considering “a reverse” for her mother who needed cash to stay in her home.
Another person at the table said:
“I know all about reverse mortgages. When you die, the bank gets your house.”
Wrong. The bank “taking your home” is the biggest reverse mortgage myth.
The lender never takes title to the home, regardless of how much in reverse mortgage funds has been paid out to the homeowner. When the homeowner (minimum age of 62) moves out or dies, the debt is paid and the remainder goes to the estate. If the amount owing is greater than the value of the home, the lender is only entitled to the value of the home. If the surviving spouse was part of the reverse mortgage contract, she/he can remain in the home. When the surviving spouse dies or moves out, the reverse mortgage debt is paid.
Other reverse mortgage myths:
- The bank gets an equity share. Since FHA starting insuring reverse mortgages, lenders have never received a portion of future appreciation.
- Reverse mortgage funds must be used to improve the property. If no mandatory repairs are needed, funds can be used for any purpose – including vacations, new cars and RVs.
- Reverse mortgages cannot be used to purchase a home. If a 70-year-old homebuyer wanted to purchase a $300,000 home, he or she could put approximately $123,000 down and finance the balance of $177,000, plus closing costs, with a reverse mortgage. The buyer would make no monthly payments for as long as he or she maintained the home as a principal residence.
- Reverse mortgage fees are too expensive. Compared to what? Moving into a retirement home? Leaving your friends, church and community? You can tell a person what something costs, but you have no idea what it is actually worth to them. The maximum loan fee on an FHA reverse mortgages is 2 percent on the initial $200,000 of the home’s value and 1 percent on the balance thereafter, with a cap of $6,000.
Most seniors want to age in place – stay in the home they have now. Reverse mortgage funds, available to homeowners over the age of 62, can help them stay put. The older you are, the more cash you can tap.
For cash-strapped seniors – and aging boomers who have not saved for retirement – reverse mortgages can play a critical role in financing the future.
