I put the meat of this article right up front because I know people are busy and want to get right to the point. Now that you know the answer to the to the headline question, you can be on your way…Or you can stick around for a few more minutes to understand the details.
However, before we dig in, I should briefly explain what a reverse mortgage is. In a nutshell, a reverse mortgage is a loan specifically designed for people aged 55 and older (FHA insured reverse mortgages have a minimum age of 62), that allows you to convert a portion of the value of your home into cash that you can use however you choose.
The home stays in your name and it is your responsibility to continue to pay your property taxes and homeowners insurance as well as maintain the home and live in the home as your primary residence.
As long as you do these things, you are never required to pay a mortgage payment, however, you are still charged interest (and mortgage insurance on the FHA insured reverse mortgage), on a monthly basis. Since you are being charged, but not paying it, the interest is added to your loan balance. This is what is meant by “negative amortization”.
Now that you have a brief understanding of reverse mortgages, let’s dive into the misconceptions.
#5. You cannot use a reverse mortgage to purchase a home.
You can use a reverse mortgage to purchase a home as long as it will be your primary residence. You can use either the FHA insured reverse mortgage program, call the Home Equity Conversion Mortgage (HECM), or the proprietary reverse mortgage program. Click here to learn more about this program or you can watch this two-minute video.
See mortgagee letter 2008-33
#4. The bank owns your home and allows you to stay in the home.
With a reverse mortgage, you continue to own the home. You can add a room or paint it purple. It is your home. The reverse mortgage is just a loan against the home. The loan becomes due and payable when the last borrower (or non-borrowing spouse) permanently leaves the home.
See HUD Handbook 4235.1 Chapter 1-2
#3. You can outlive the reverse mortgage.
To be perfectly clear here, it is possible to outlive the money you receive from the reverse mortgage, but the actual loan does not come due until the last borrower, (or non-borrowing spouse), permanently leaves the home. If you use all the money available to you from the reverse mortgage, but continue to live in the home and keep up with your property taxes and homeowners insurance as well as maintain the home, you can continue to stay in the home without making any monthly payment to the lender
The same rules apply if the balance on the reverse mortgage loan exceeds the value of the home (your home is underwater). The loan cannot be called due as long as you continue to meet the obligations mentioned above. In fact, if you are underwater on the home, but still have funds in available to you on the HECM reverse mortgage, these funds cannot be closed out. You will still have access to them.
See HUD Handbook 4235.1 Chapter 1-3 & 24 CFR 206.27(b)(8)
#2. Reverse Mortgages are only for desperate people.
It is true that a lot of people think a reverse mortgage should only be used as a “last resort”. Unfortunately, people who still believe this are misguided.
Today’s reverse mortgages are designed to be part of an overall, long-term financial plan that helps people maximize all their assets – including the equity in their home. The goal of this financial plan is to relieve financial stress and help people live a comfortable, active lifestyle that meets their needs during retirement.
See HUD Handbook 4235.1 Chapter 1-2 “Purpose of the Program”
#1. The bank will take your home when you die.
I have been battling this misconception since I started originating reverse mortgages bask in 2003, and it is as prevalent today as it was back then.
The lender does not automatically take the home when the last borrower dies. The reverse mortgage lender simply has a lien on the home, just like any other mortgage company does with a traditional mortgage. The home is inherited by whomever you name in your will. The reverse mortgage does have to be paid in full at this time, but there is a process for this and your heirs have options.
See HUD.gov – HECM Servicing FAQ & 24 CFR 206.125
My main goal as a reverse mortgage specialist is to educate people about this terrific program. Hopefully this brief article helps to shed light upon these common misconceptions about reverse mortgages and help people to open their minds to a great way to use home equity to relieve financial stress and provide peace of mind.
Please feel free to contact me with any questions.