Myths and Misconceptions of Reverse Mortgages
1. Your home must be debt-free to qualify for a reverse mortgage.
False. Even seniors with an outstanding first mortgage or some other debt on their home may qualify for a reverse mortgage. The proceeds of the reverse mortgage, though, must first be used to pay off such debts.
2. There are restrictions on how a Reverse Mortgage may be used.
False. Reverse mortgages have no limitations on how the proceeds can be used. To qualify this a little, sometimes a government agency such as a city or county will have limited reverse mortgages that are for specific purposes, such as putting in a wheelchair ramp.
3. Only those with excellent credit, income and/or health can qualify.
False. While there are qualifying requirements looking at income, expenses and credit (as of April 27, 2015), they take into account many reasons why there might be credit issues. See my page on Financial Assessment for more detail.
4. A Reverse Mortgage is like an equity loan. I will need to make monthly payments on the Reverse Mortgage.
False. The homeowner is only responsible for paying the taxes, insurance and upkeep of the home. As long as the home is your primary residence you will never have to make a payment.
5. I can be thrown out of my home.
False. The homeowner can stay in their home for as long as they wish.
6. My heirs will be responsible for repayment of the Reverse Mortgage. I can owe more than my home is worth.
False. The Reverse Mortgage is a non-recourse loan. The lender can only look for repayment from the sale of the property, although the repayment may be made from any other source and your heirs may keep the home. The lender cannot look to the estate for repayment of the loan.
7. Reverse Mortgages are only for desperate seniors, or for the "house rich, cash poor.
False. The reverse mortgage is an excellent financial planning tool that has been used by homeowners from all walks of life to enhance their retirement years. While some have needed the cash from a reverse mortgage more than others, the growing popularity of this product is evidence of its benefit in a wide array of financial circumstances. See my article $1,000,000 for a little more on this.
8. The Bank owns the home after you get a reverse mortgage.
False. You own your home and retain title throughout the life of the reverse mortgage. Once you permanently move out of your home or pass it to your estate, the loan must be repaid.
9. When a reverse mortgage comes due, the bank sells the home.
False. When the loan must be repaid, you or your heirs can either pay the balance due on the reverse mortgage and keep the home, or sell the home and use the proceeds to pay off the reverse mortgage.