With so many scams targeted at the elderly, many people wonder whether reverse mortgages are a legitimate option for generating cash or simply another scheme that exploits seniors.
Simply said, a reverse mortgage or Home Equity Conversion Mortgage (HECM) enables homeowners 62 years and older to convert part of their home equity into tax-free cash. It may prove a good solution for seniors whose savings accounts are dwindling or who simply need a little extra income each month.
- Myth: Reverse mortgages are exactly the same as home equity loans. The only similarity between a reverse mortgage and home equity loan is that both use the home’s equity as collateral. With a traditional home equity loan, borrowers make regular monthly payments toward the principal and interest. With a reverse mortgage, the loan isn’t due until you sell the home, live away from the home for 12 consecutive months, fail to pay property taxes or insurance, or pass away.
- Myth: Your heirs will not inherit your home. Your estate will inherit your home, but there will be a lien on the title, which will include the financial proceeds from the reverse mortgage plus interest.
- Myth: You may be forced out of your home. Actually, this loan was designed to help seniors continue living in their own homes for the rest of their lives. In fact, you will never be evicted or foreclosed upon unless you fail to pay property taxes and insurance or let your home fall into disrepair.
- Myth: You can lose Medicare and Social Security. Not true. Reverse mortgages have no impact on Medicare and Social Security, though needs-based programs like Medicaid may be affected. To keep Medicaid benefits, you will need to manage your monthly withdrawal to ensure your income does not exceed Medicaid limits.
- Myth: Reverse mortgages are costly. Yes and no. With a reverse mortgage and any other home loan, you are required to pay origination fees and closing costs. Depending on the type of loan you select, you may also be required to pay upfront mortgage insurance. That said, your heirs will never have to repay more than the home is worth, even if your loan balance is higher than the appraised value.
- Myth: A reverse mortgage is a last-ditch option. Actually, reverse mortgages are best used as part of a comprehensive financial plan – not a last resort for seniors who can’t make ends meet. Under the right circumstances, this type of loan will supplement your income to allow you to live more comfortably in your golden years.
Before obtaining a reverse mortgage, the U.S. Department of Housing and Urban Development requires seniors to undergo reverse mortgage counseling from an approved third-party organization like Take Charge America. Certified HECM counselors guide seniors through the process, loan terms, financial and tax implications, and alternatives.