Top 8 Myths of Reverse Mortgages Debunked by Pete Mendenhall with NASB
As Investors and Realtors we often found people that we might be able to help stay in their home by suggesting a Reverse Mortgage or help people buy our houses using a Reverse Mortgage.
So let’s find out a bit more about the Reverse Mortgage.
The New Reverse Mortgage, Real name is Home Equity Conversion Mortgage (HECM) .
This is a FHA program designed for Home owners 62 years of age or Older.
A few basic facts about the program.
- The borrower(s) must be at least 62 years old.
- The property must be the borrower’s primary residence for six months or more each year.
- Any cash taken out of the home equity is treated as tax-free. It does not affect Social Security or Medicare benefits, and can be used for any purpose the homeowner wishes.
- The money can be received as a lump sum, a line of credit, a monthly payment, in any combination of these three options.
- There are no mandatory repayments. The FHA HECM can be repaid at any time without penalty.
- The title or deed of the home remains in the borrower’s name.
- The maximum loan amount is calculated using the youngest borrower’s birthdate, interest rate, property appraisal value and maximum FHA lending limit.
- Mandatory HUD (Housing and Urban Development) certified counseling conducted in person or by phone is required prior to applying for this loan.
- Reverse Mortgages may be used to refinance or purchase a primary residence.
Now to deal with the 8 Myths of the program. this list was put out by National Council on Aging. (ncoa)
Myth #1: A reverse mortgage works the same as any other type of home loan.
A reverse mortgage is a special type of loan for homeowners aged 62 and older that lets you convert a portion of the equity in your home into cash. But unlike a traditional home equity loan or second mortgage, you don’t have to repay the loan until you either no longer live in the home as your principal residence or you fail to meet the obligations of the mortgage. Taking out a reverse mortgage is a big decision, since you may not be able to get out of this loan without selling your home to pay off the debt. You also need to carefully consider your options to avoid using up all the equity you have built up in your house.
Myth #2: Most reverse mortgage borrowers use their loan funds for vacations and other fun things.
The truth is that most borrowers today use their loans for immediate needs, such as paying off their existing mortgage or other debts. About 33% of homeowners who consider these loans want to supplement their monthly income, so they can afford to continue living in their own home longer.
Myth #3: Reverse mortgages are too expensive.
Taking out any home loan can be costly because of origination fees, third-party closing charges (such as an appraisal, title search, and recording costs), and servicing fees. You can pay for most of these costs as part of the reverse mortgage loan. Borrowers who select a traditional HECM Standard reverse mortgage also must pay a hefty upfront FHA mortgage insurance premium that can be as much as 2% of the value of their home. But this insurance guarantees that you will receive the expected loan payments.
In addition, you (or your heirs) don’t have to repay more than the value of the home, even if the amount due is greater than the appraised value. The new SAVER HECM reverse mortgage is less expensive because it all but eliminates the upfront insurance fee. However, borrowers get a smaller loan amount with a HECM Saver than with a Standard loan.
Myth #4: Reverse mortgages should only be used as a last resort.
It’s never a good idea to make a financial decision under stress. Waiting until a small issue becomes a big problem reduces your options. If you wait until you are in a financial crisis, a little extra income each month probably won’t help. Reverse mortgages are best used as part of a sound financial plan, not as a crisis management tool.
Myth #5: Most people who take out a reverse mortgage are elderly widows.
When HECMs were first offered by the Department of Housing and Urban Development (HUD), a large proportion of borrowers were older women looking to supplement their modest incomes. But that has changed.
During the housing boom, many older couples took out reverse mortgages to have a fund for emergencies and extra cash to enjoy life. In today’s economic recession, younger borrowers (often boomers) are turning to these loans to manage their existing mortgage or to help pay down debt.
Reverse mortgages are unique because the age of the youngest borrower determines how much you can borrow. A challenge is that borrowers deplete home equity as their loan balance grows over time.
Myth #6: A fixed rate reverse mortgage is always a good idea.
If you’re like most homeowners, you’ve had a traditional 30-year home loan with a fixed interest rate. This allowed you to know how much you needed to budget for mortgage payments each month.
However, this conventional thinking does not apply to reverse mortgages, which do not require any monthly payments.
There are several drawbacks to HECM reverse mortgages with fixed interest rates. These loans require borrowers to draw all of their funds out at closing, which means they will pay interest on a potentially large sum of money. This could use up your home equity very quickly. An adjustable rate HECM, on the other hand, gives borrowers the option to select a line of credit and only pay interest on what they use. The line of credit may increase over time if interest rates go up, giving borrowers access to more cash.
Myth #7: Reverse mortgage counseling is a waste of time.
Deciding whether to take out a reverse mortgage loan is challenging. It’s hard to estimate how long you’ll stay in your home and what you’ll need to live there over the long term.
Federal law requires that all individuals who are considering a HECM reverse mortgage receive unbiased counseling by a HUD-approved counseling agency. A trained counselor can help you understand the costs and features of different types of reverse mortgage, and evaluate the pros and cons of these loans for your situation. They will also discuss other options including public and private benefits that can help you stay independent longer.
It’s valuable to meet with a counselor before talking to a lender, so you don’t get talked into a loan you don’t want or need. Telephone-based counseling is available nationwide, and face-to-face counseling is available in many communities.
Myth #8: Most reverse mortgage borrowers who end up facing foreclosure were scammed.
It is possible for a reverse mortgage borrower to face foreclosure if they do not pay their property taxes or insurance, or maintain their home in good repair. This is especially a risk for older homeowners who take the entire loan as a lump sum and spend it quickly—perhaps as a last-ditch effort to salvage a bad situation. Those who struggle to pay the bills each month can become overwhelmed by health or other large expenses, making it difficult to keep up with borrower obligations. Older homeowners may be targets for scam artists who offer too-good-to-be-true real estate or investment deals. Sadly, there are also cases where seniors are talked into a reverse mortgage by family members who want to get their hands on the cash.
For any additional information please contact me.
PETE MENDENHALL, CRMP, CAPS | Reverse Mortgage Team Lead (NMLS ID#: 715505)
NORTH AMERICAN SAVINGS BANK, F.S.B. (NMLS ID#: 400039)
P: 866.627.8081 F: 816.508.2457
903 E. 104th Street, Suite 400 | Kansas City, MO 64131 | http://www.nasb.com