Reverse Mortgage Myths and Facts

Separating what's true from what's heard.

If you've heard mixed things about reverse mortgages, you're in good company. Plenty of thoughtful people have doubts, and some of those doubts were well founded at one time.

The rules have changed a great deal since the early days, and several of the most common beliefs no longer hold. The bank doesn't take ownership of the home. Heirs aren't left owing more than the home is worth. And a reverse mortgage isn't only for people who are out of options.

Other concerns are fair and worth taking seriously. A reverse mortgage has costs, the loan balance grows over time, and property taxes, insurance, and upkeep remain the homeowner's responsibility.

What was true twenty years ago isn't always true today.

Common Reverse Mortgage Myths, Answered

Does the bank take ownership of my home with a reverse mortgage?

It's the biggest myth about reverse mortgages, and it's easy to understand why it worries people. Your home is where your life happened, and the thought of losing it can feel like losing something that can't be replaced.

Here is what actually happens. With a reverse mortgage, the title stays in your name, the same way it does with any mortgage you've had before. The lender holds a lien against the home, which simply means the loan is repaid from the home's value someday. It does not mean the lender owns it.

What continues are the same responsibilities that come with owning any home: keeping it in good repair, paying property taxes and insurance, and living there as your primary residence. As long as those are kept up, the home remains yours to live in.

Borrowing against something has never meant giving it away.

Will there be any equity left for my children?

Wanting to leave something behind for your children is one of the most natural hopes there is. For a lot of families, the home is the legacy, so the worry that a reverse mortgage might use it all up is an understandable one.

Here's how it works. Interest is added to the loan over time, so the balance grows and equity typically decreases. But how much remains depends on real factors: how long the loan lasts, how much is borrowed, and how the home's value changes over the years. Homes often continue to gain value while the loan is in place.

When the loan is repaid, usually from the sale of the home, whatever equity is left belongs to your heirs. It doesn't go to the lender.

A home can support you now and still be part of what you pass on.

Will my children have to repay the loan?

Parents carry a quiet fear of becoming a burden to their children. It's one of the most loving worries there is, and on this point, families can rest easy.

A reverse mortgage is what's called a non-recourse loan. That means it's repaid from the home itself, never from your children's savings, paychecks, or other assets. Even if the loan balance grows larger than the home's value, no one in the family owes the difference.

When the time comes, your children have choices. They can sell the home and keep any remaining equity, or keep the house by paying off or refinancing the loan. If they'd rather walk away, they can do that too, without owing anything.

The house can be a gift without becoming a burden.

Do I have to make monthly payments on a reverse mortgage?

After decades of writing a mortgage check every month, it's hard to imagine a home loan without one. That habit runs deep, and it's a big reason this myth hangs on.

With a reverse mortgage, monthly mortgage payments are optional. Interest is added to the loan balance instead of being paid each month, and the loan is repaid later, typically when the home is sold.

Some borrowers still choose to make payments, to slow the growth of the balance or preserve more equity, and they're free to do that. What every homeowner continues to handle are property taxes, insurance, and upkeep, just as they always have.

Flexibility is most valuable when it's yours to use or not.

Does my mortgage need to be paid off first?

Most people assume a home has to be paid off before a reverse mortgage is even possible. It's a reasonable guess, since most loans seem to require a clean slate.

Owning the home free and clear isn't required. In fact, paying off an existing mortgage is one of the most common reasons people consider a reverse mortgage. The existing loan is paid off at closing using the reverse mortgage itself, as long as there's enough equity to cover it.

For a lot of homeowners, that's exactly the appeal. The monthly mortgage payment they've made for years goes away, and the money that used to cover it stays in their budget.

You don't have to finish one chapter to begin the next.

Can I sell my home if I have a reverse mortgage?

It's natural to worry about being locked in, especially at a stage of life when plans can change quickly. A move closer to family, a smaller home, or a change in health can all reshape what home needs to be.

A reverse mortgage doesn't take that choice away. You can sell your home at any time, just as you could with a traditional mortgage. The loan is paid off from the sale, and the remaining proceeds are yours.

There's no penalty for selling, and no need for the lender's permission to put your home on the market.

A good decision leaves the door open.

Listed below are the common myths followed by the facts of reverse mortgages that will bring clarity and assist you in making the most informed decision.

Reverse Mortgage Myths and Facts

Myth: You immediately sign over ownership to your home.
Fact: You retain title to your home as long as you meet the loan guidelines and requirements such as: maintaining the property, paying all property charges such as property taxes, homeowners insurance, flood insurance, and homeowners association dues (if applicable), and avoiding extended absences from the home longer than six months.¹ As with any other mortgage, a lien is placed on the property to secure future repayment of the loan.

Myth: If you take out a reverse mortgage loan your children won't be left with any of the home equity.
Fact: 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 will be left, such as home appreciation, length of the loan, and optional monthly payments. There can still be equity left for your children.

Myth: Your children will be responsible for repaying the loan when you die
Fact: 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. While your heirs will not be responsible for the loan repayment, they will still have the option to refinance the loan to purchase it for themselves.

Myth: A reverse mortgage requires that you make monthly mortgage payments.
Fact: While you can choose to make mortgage payments, they are not required with a reverse mortgage. The borrower is still responsible to maintain the property, pay property taxes, homeowners insurance, flood insurance, and homeowners association dues (if applicable).¹

Myth: You must have your first mortgage paid off before you can qualify for a reverse mortgage.
Fact: While any 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 getting a reverse mortgage.

Myth: You are not allowed to sell your home if you have a reverse mortgage.
Fact: You can sell your home if you wish and - just like any other mortgage loan - you must pay off the reverse mortgage at closing. There are also no prepayment penalties if you choose to pay off your loan early or make loan payments.

Some Additional HECM Loan / Reverse Mortgage Loan Facts

• Many retirees use a reverse mortgage.
• A reverse mortgage allows older homeowners to access a portion of the value of their home.
• A reverse mortgage is a specialized loan for homeowners 62 and older.
• A reverse mortgage is eligible only for the borrower’s primary or principal residence.
• Reverse mortgages that are FHA-insured (Home Equity Conversion Mortgages) are insured by the Federal Housing Administration providing protection for both borrowers, lenders and beneficiaries.
• HUD counseling (from an independent HUD-approved third-party counselor) is required prior to the borrower incurring any costs associated with the loan.
• The cash or proceeds you receive from a reverse mortgage typically are not subject to individual income taxation. However, we suggest you consult your tax advisor to provide guidance for your particular situation.²
• It is not a government grant, but a loan that is repaid in the future when the home is sold, the last borrower dies or permanently leaves their residence, or the loan terms are not complied with.²
• Reverse mortgage proceeds could affect government needs-based programs such as Medicaid and Medi-Cal. Those receiving such benefits should consult a professional before obtaining a reverse mortgage.
• A reverse mortgage loan is secured by a mortgage on the home and failure to comply with loan terms could result in foreclosure.
• It’s a specialized loan. However, program rates, fees, terms, and conditions are not available in all states and are subject to change.
  
  

^{¹There are some circumstances that will cause the loan to mature and the balance to become due and payable. The borrower is still responsible for paying property taxes, homeowner’s insurance and maintaining the property to HUD standards. Failure to do so could make the loan due and payable. Credit is subject to age, income standards, credit history, and property qualifications. Program rates, fees, terms, and conditions are not available in all states and subject to change.}

^{²Borrowers should seek professional tax advice regarding reverse mortgage proceeds.}