Reverse mortgages are a financial product that have gotten a lot of bad press over the years, leaving many people who could potentially benefit from this type of loan with negative associations and a bad taste in their mouths.
But what’s so wrong with this federally-insured Home Equity Conversion Mortgage (HECM) program? Is it really as bad as some media outlets would have you believe?
The short answer is no, but don’t just take our word for it—we’ll prove it, too. For starters, reverse mortgages are becoming more common among borrowers of all ages, with nearly half of homeowners considering a reverse mortgage under the age of 70, according to a 2012 MetLife Mature Market Institute study on the changing attitudes and motives of reverse mortgage borrowers.
The study revealed that homeowners looking into getting a reverse mortgage are interested for a variety of reasons, including to reduce household debt, enhance lifestyle, and plan for the future.
Do you have a problem with reverse mortgages? If so, let’s take a look at a few issues commonly raised about this type of loan—maybe we can debunk some myths for you.
Common Reverse Mortgage Myths
Claim: Reverse mortgages are a last resort.
Response: Not necessarily. Reverse mortgages have often been considered a loan of last resort for borrowers who simply have no other options. And while they can be a great choice for individuals who are “cash poor, house rich,” this loan doesn’t have to be kept as a last-ditch effort to stay afloat.
“Using home equity as more than a ‘last resort’ can help to keep cash shortfalls from becoming big problems,” says MetLife in the study we mentioned above. “For example, homeowners may choose to use these funds to provide more choice and control in their lives; pay for home repairs, tax bills, and other choices which allow them to stay in their homes. In some situations, a reverse mortgage may stabilize a difficult financial situation such as forestall a foreclosure and allow time for the homeowners to find more effective solutions to their cash flow problems.”
Claim: The bank takes your home.
Response: False! When you take out a reverse mortgage, you retain the title of your home. You are not transferring ownership to the bank; rather, the bank is allowing you to tap into your home’s equity in the form of a loan. The loan is generally repaid when borrowers sell their homes, but the bank does not automatically “take” your home unless you choose that method to repay your mortgage.
Claim: If you get a reverse mortgage, you won’t qualify for any benefits programs.
Response: That’s not entirely true. Reverse mortgage borrowers will still qualify for Medicare and Social Security—programs that are available through age and entitlement qualifications, not on a needs basis.
Needs-based programs such as Medicaid and Supplemental Security Income (SSI) may be affected by reverse mortgage proceeds, however, because these programs consider an individual’s assets when determining if they qualify to receive benefits. These considerations vary state by state, so if you currently are a Medicaid or SSI beneficiary, check your state’s requirements to find out if a reverse mortgage would affect your eligibility.
Problem #1: Reverse Mortgages are “Too Expensive”
One common warning financial planners may give on the topic of reverse mortgages is that they’re too expensive.
Fortunately, they don’t have to be.
There are fees associated with taking out a reverse mortgage, yes. But there’s also a federally-insured product—the HECM Saver—which substantially reduces the amount it costs to originate a loan.
The traditional reverse mortgage program (the HECM Standard) requires borrowers to pay an upfront Mortgage Insurance Premium (MIP) of 2% of the loan’s value, along with an annual premium of 1.25% of the loan balance.
However, the HECM Saver program, for borrowers who don’t need or want as large of a loan, charges a .01% upfront MIP, along with the yearly premium of 1.25% of the loan balance. That’s right, just .01%—a fraction of the HECM Standard, which can represent significant cost savings.
Another thing to consider is that many of the origination fees can be paid for with reverse mortgage proceeds, so you don’t necessarily have to pay all of the costs out-of-pocket. Depending on secondary market conditions you may even find some $0 Closing Cost Options.
Problem #2: I’ll Drain All My Equity
Some detractors have used an argument that reverse mortgages use up all of a homeowner’s equity. While this can occur in some cases, it doesn’t have to happen.
Reverse mortgage borrowers can control how much equity they use. As we mentioned above, if you only want or need a smaller loan, a HECM Saver could be the right option for you. Not only would you benefit from smaller upfront fees, but it automatically limits the amount of equity you can draw down.
Another option is for borrowers to make interest payments on their loan to preserve the amount of equity in their homes. This is a 100% voluntary option, meaning you don’t HAVE to make interest payments during the loan’s term. But if you’re concerned about how much interest is being added to your loan, this could help you manage the size of your mortgage.
All Reverse Mortgage has developed the first ever amortization calculator that can show you how to keep your reverse mortgage balance from rising by applying a monthly payment option.
An added perk in paying interest on your loan is that you can deduct it from your taxes, so if you’re interested in pursuing this option, talk to your tax advisor.
Problem #3: I’ll Be Stuck in My Home
Reverse mortgages allow you to stay in your home—they don’t trap you there. Borrowers are able to repay their loans at any time if they so choose. And if they need to leave their house to enter any sort of care facility, they can, although they will be required to repay the mortgage (usually by selling the home).
For borrowers who are nervous to pay the upfront fees of a reverse mortgage if they’re not sure how long they’ll be able to remain in their home, consider a HECM Saver.
If your home’s value has gone up significantly after you took out a reverse mortgage, and you think the amount of equity you’ve been able to access is too small, you can even refinance your reverse mortgage for a higher loan amount, or to take advantage of better interest rates.
So, What’s Your Problem with Reverse Mortgages?…
Now that we’ve debunked some myths and cleared up some problems, do you have any more questions about reverse mortgages? If you do, or if you think this type of loan might be right for you, talk to the experts at 800-565-1722—we’ll be happy to help.