HECM Reverse Mortgages
Myths & Facts
In the early 1960s, when reverse mortgage loans were first introduced, they did not have any government programs backing it. It wasn’t until 1983 when the Senate approved the proposal of having the Federal Housing Administration (FHA) to insure reverse mortgages. The Federal Housing Administration has been guaranteeing HECM mortgages ever since it was passed into law in 1988 by President Reagan. Since then FHA and HUD have made many amendments to the program to improve consumer protections.
It is my job to give you the best education available with the most up-to-date facts so you can make a bright and educated decision. Here are some of the most common myths I have heard:
MYTH: Reverse mortgages are too expensive.
FACT: There have been changes in FHA’s HECM
reverse mortgage program in recent years that reduced a borrower’s costs. While any reverse mortgage is still more expensive than a traditional mortgage, they may provide you with more options than a traditional mortgage, such as no mortgage payments and a growth option (growth applies to the credit line’s unused funds). You must still continue to pay home expenses such as taxes and insurance, and maintain the home.
MYTH: Your home will be taken away when you pass
away and the family loses the rights to the property.
FACT: Because the house is in your name, you or your
heirs make the decision to sell or pay off the mortgage
balance. If the mortgage balance is too high, the payoff
is limited to the value of the house, and the remaining
amount is paid by the FHA mortgage insurance fund.
Remember that your heirs can always purchase the home for 95% of the appraised value or the mortgage balance, whichever is lower.
MYTH: I could lose my home and be forced to move.
FACT: As long as all loan terms are met, you cannot be
forced to sell the home and/or move. Terms include living in the home as your primary residence, maintaining the home, and paying home expenses such as taxes and insurance.
MYTH: I will be giving up the deed to my home and
I won’t own it anymore.
FACT: The deed always stays in your name and you
have all the rights that you do now. You can sell it, remodel it, and keep any equity that is left when you move.
MYTH: A reverse mortgage loan should only be
considered as a loan of last resort.
FACT: Many folks think a reverse mortgage can only be used when all other accounts and options are exhausted. While it is a great loan to add cash flow for a borrower 62 and better that has fallen on hard times (including potentially a foreclosure situation*), it should also be used earlier in retirement to avoid future problems by keeping the home safe with the retiree “aging in place.” *This information does not constitute legal advice. You should consult an attorney for your specific situation..
MYTH: The safest thing is a house “free and clear.”
FACT: In the event of an extended nursing home stay
or a lawsuit, all your home equity can be lost that you
spent your whole life to create. A reverse mortgage can
unlock that equity and allow you to manage it properly
for the benefit of your family. Talk to your financial
advisor about how a reverse mortgage can help you do
this, including helping you pay for longer-term expenses
such as medical and/or nursing home expenses.
MYTH: My children could get stuck with a big
mortgage debt if I live too long.
FACT: Your children can never be liable for any amount over the value of the home because the loan is guaranteed by the FHA Mortgage Insurance Fund (FHA/HUD).
MYTH: Your house must be debt-free to qualify for a reverse mortgage.
FACT: You can use a reverse mortgage to pay off a
current mortgage provided the available FHA borrowing
limit is high enough to cover your balance.
Reverse Mortgage Basics:
A reverse mortgage is a way to turn the equity in your home into tax-free* cash without having to make monthly mortgage payments. Instead of monthly payments, the loan is repaid in one lump sum when the last borrower leaves the home. As part of the loan, the borrower is required to continue paying property taxes and insurance and maintain the home. Here are the four basics of reverse mortgages that you should know:
1. Receive Tax Free* Money from Your Home Equity
A reverse mortgage can be a financial tool* to turn equity in your home into cash that can be used for many different purposes that may enhance and extend your retirement plan. If you currently have a mortgage, a reverse mortgage could eliminate your current monthly payment, and also allow you to access any additional equity (over and above your mortgage balance) to create accessible cash which is not readily available while in the form of home equity. You have spent many years putting your money into your home equity and now with a reverse mortgage, you may be able to convert that equity in to tax-free cash.
2. Eliminate your Monthly Mortgage Payment
Most reverse mortgages are insured by the Federal Housing Administration (FHA) and are called Home Equity Conversion Mortgages (HECM). A HECM is a mortgage that does not require a payment until you pass away or move out of your home. You are required to always pay taxes and insurance on your home, but whether you take a line of credit, monthly checks, or a lump sum, you will not be required to make a payment during your lifetime as long as you live in your home. However, should you choose a line of credit, you have the option of paying down the line should you wish to have less cash and increase your equity.
3. Never Owe More Than What the Home is Worth
When you permanently move out of your home, whether you sell it or pass away, neither your estate nor your heirs are responsible to pay the deficit if the balance owed on your reverse mortgage exceeds the home value. However, should your heirs want to keep your home, they may purchase it for 95% of the current appraised value.
*The information in this article does not constitute tax advice or financial planning advice. Please consult a tax advisor for tax advice and a financial planner regarding enhancements to retirement plans.
4. Reverse Mortgage Requirements
- One Borrower must be age 62 or older
- FHA qualified home
- Must be a primary residence
- Existing mortgage must be paid off or refinanced with a Reverse Mortgage
- Counseling required from a HUD approved agency prior to the loan application
- Approval of Basic Credit & Income Qualifications required
Contact me to learn more about how a reverse mortgage can help you!