These should probably be called the reverse mortgage myths or misconceptions. Let me start by making a very simple statement. A reverse mortgage is just a loan. Just like any other loan you've ever had. You do use the title (deed) as collateral for the loan, but you still own the home. The only difference is that you don't make monthly payments, or any payments for that matter, as long as you live in your home as your primary residence. The following list is the more common list of so called "disadvantages" along with the correct explanation.
1. The lender owns my home after a reverse mortgage takes place.
This is the most common misconception. The number of times that this is brought up is incredible. Normally it it said something like "Don't do a reverse mortgage, you will lose your house." Unfortunately this is creating a wave of people that hear it and believe it. But it is just not true. You own the home. Any equity remaining is yours or your heirs.
2. I can owe more on my home than it is worth, leaving excessive debt to my heirs.
There is no way to leave debt to your heirs. That being said, if there are any assets to an estate, your heirs will need to pay off the debts of an estate before they can realize the remaining assets. But you can not leave a debt to an heir. There is no way for the lender or bank to require them to pay your debt. There are also provisions in a reverse mortgage that are safeguards against you owing more than the home is worth.
3. The lender or State at some point will take my home.
Lenders are not in the business of taking homes. They want you to pay your interest. That is how they make their money. If you do not pay your taxes or insurance however, you could find that you are in default. If your taxes are more than your budget allows, you might consider having them deferred. Oregon is a State that allows this, but not all do.
4. I can be thrown out of my home.
This is simply not true.
5. Only desperate seniors would do it.
Not so much reverse mortgage disadvantages as it is a myth, it needs to be addressed. While this is a great program for desperate seniors, it is not just for them. Some of the great ideas I have seen are listed below.
- Be able to retire comfortably.
- Build an RV pad at kids home to be able to visit without intruding.
- Buy a vacation/rental home.
- Pay for in home care.
- Remove mortgage payments.
- Hire a yard service to "keep up" the property.
6. My home needs to be paid off to qualify.
As long as you have enough equity in your home and you are 62 or older, you qualify.
To determine if you have enough equity in your home, you will need to estimate your homes value or get an appriasal. Make sure if you choose the appraisal route, call us first so you get the right kind. Otherwise you could be throwing away money.
7. I have bad credit and can't qualify.
If the bad credit is attached to the real estate (your home), you may have to pay it off upon getting your new loan, with the proceeds of the new loan. But otherwise credit or income for that matter is not a factor when it comes to qualifying.
8. I will be taxed on the money I receive.
There are no tax consequences on the money received with this loan. Additionally it does not affect any Social Security or Medicare. However, if you are on Medicaid, there are some considerations that need to be reviewed.
9. When I am older I will get more money.
This is actually true, assuming that none of the terms of the loan change. The biggest factor that determines how much equity you get to use is your interest rate. When interest rates are lower, you will get a lot more money than just adding a few years to your age. A 0.25% change in the rate could mean thousands of dollars difference in what your going to receive. A few years in age doesn't come close to comparing to that.
10. Financial planners know what is best in mortgages.
This one is just for fun to round out my ten misconceptions and I will probably make a few planners angry, but the reality is that a lot of professionals that you respect in your life, be it family or friends,
don't really know mortgages. It would be like trusting your family doctor to fix a cavity. While the family doctor is very educated, he doesn't specialize in dentistry. Talk to a mortgage broker and get advice from someone who knows the industry.
In summary:
Hopefully after reading this page, you understand that there is no more reverse mortgage disadvantages than any other mortgage. If it helps your financial situation, then it probably is right for you.
You can get more information on reverse mortgages, how they work by following the link. If you are looking for a reverse mortgage calculator, we have a free one on this site.