Headlines like these aren’t welcome news to anyone: “Rising Prices: Which Goods and Services are Driving Inflation?” or “U.S. Inflation Picked Up in December.” For older Americans on fixed incomes, such articles can be particularly worrying. Many seniors desperately want to remain in their homes as they age, but that becomes increasingly difficult when property taxes, borrowing costs and consumer prices remain high.
In recent years, reverse mortgages have emerged as a potentially viable solution for many seniors grappling with this issue. Unfortunately, as the profile of reverse mortgages has grown, so have the myths and misconceptions about them.
“While reverse mortgages aren’t ideal for everyone, they offer genuine benefits for many seniors and can help eliminate some of the most prevalent anxieties around aging in place.”
While reverse mortgages aren’t ideal for everyone, they offer genuine benefits for many seniors and can help eliminate some of the most prevalent anxieties around aging in place. So, this seems like a good time to analyze what reverse mortgages are and separate some of the myths from reality.
Supplemental income
Reverse mortgages are a special type of loan for homeowners ages 62 and older. There are different types with varying structures, but reverse mortgages allow seniors to convert part of their home’s equity into cash, which helps retirees supplement their income and more comfortably age in place.
Unlike most loans, with a reverse mortgage, there are no required monthly mortgage payments as long as homeowners live in the home. Borrowers also retain the title to their homes, and they can receive the funds as a lump sum, in monthly installments, as a line of credit or a combination of these.
The loan is repaid when the home is sold, or the homeowner moves out or a death occurs. If the sale proceeds don’t cover the loan amount, the Federal Housing Administration insurance covers the difference, so no debt is passed to heirs.
Another helpful aspect of a reverse mortgage is that there aren’t a lot of requirements to qualify. For couples, the age of the youngest borrower is used for the age requirement. Borrowers must maintain the property and cover any associated fees, along with ongoing costs like taxes, insurance and possibly homeowners association fees.
The property must be the primary residence, either owned outright or with significant equity (typically at least 50%). The Department of Housing and Urban Development mandates independent counseling to ensure borrowers understand the reverse mortgage process, costs and implications. Counseling sessions typically last 90 minutes and cost around $125.
In addition to an improved cash profile and helping seniors stay in their homes, reverse mortgages can deliver other benefits. For instance, the ability to use the funds however they wish, whether for day-to-day costs, medical expenses, investments, boosting retirement income or for home improvements to make their home more livable as they age. This can help preserve savings for other purposes.
If the borrower defaults, the lender can only claim the collateral (the home), protecting other assets. This enhances the ability to move to a new home that may be more affordable, easier to maintain, or better equipped for their physical needs. The funds are not taxed as income, providing more financial flexibility.
Common myths
The increasing prominence of reverse mortgages has also produced a number of widely circulated myths and misconceptions. Unfortunately, these myths often prevent seniors from considering a reverse mortgage when it could provide exactly the type of financial assistance they need.
One of the more common misconceptions is many people believe that if you sign up for a reverse mortgage that the lender now owns your home. Nothing could be further from the truth. The lender does not take ownership of the borrower’s home. A borrower owns their home until they decide to sell or they pass away.
In fact, reverse mortgages require borrowers to maintain many of the same homeownership responsibilities they currently have. Reverse mortgages are not real estate ownership transactions. They are simply loans, much like many other home equity loans.
A related myth is that if the homeowner dies before selling the home, then the lender inherits the home instead of the heirs. This is also false. Let’s say someone takes out a reverse mortgage and dies before selling their house. Their heirs will then sell it, and they pay back the amount of the loan from the sale proceeds. All of the other sale proceeds go directly to their estate and/or heirs.
This myth is particularly ironic because reverse mortgages are often a useful tool for avoiding foreclosures. They provide the cash a homeowner may need to pay for any housing or other expenses that might otherwise contribute to foreclosure. People often don’t realize that their home has generated significant equity, and a reverse mortgage can convert that equity into much-needed cash.
Comfortable decision
Some homeowners believe that reverse mortgages are only intended for those in economic need. Or people believe that they could only qualify if they have savings or incomes below a certain level or for people who are on the verge of outliving their retirement savings.
Some people may have ample funds in their 401(k) or other retirement investments, but for various reasons — for example, preferring to leave that money to their children — they’d rather not touch it. A reverse mortgage can then be a valuable option for generating money for day-to-day expenses, so borrowers can leave that 401(k) money alone.
Reverse mortgages generally do not impact either Social Security or Medicare. It’s certainly good to check with a financial adviser to confirm that this is true for each individual case. But it’s very unusual for either of those programs to be impacted by taking out a reverse mortgage.
“Even if homeowners fully understand how reverse mortgages operate and have moved beyond the myths, it’s still important to have a conversation with a trusted financial adviser.”
Even if homeowners fully understand how reverse mortgages operate and have moved beyond the myths, it’s still important to have a conversation with a trusted financial adviser. The financial needs and issues seniors face vary from person to person, and they want to make sure a reverse mortgage will work for their situation.
It’s also extremely important that seniors work with a licensed, reputable lender that’s well versed in reverse mortgages. They should also feel completely comfortable including their financial adviser or adult children in the conversations with the lender to ensure that everyone is on the same page.
One of the greatest benefits of a reverse mortgage is that it can help eliminate some of the financial anxiety many seniors face as they age in place. Making sure that their family and their financial adviser are on board with their decision to access a reverse mortgage simply provides one more layer of comfort that they are making exactly the right decision.
