Why are Rumors So Sticky??
When Reverse Mortgages were new, and barely known about by the general public, let alone by senior citizens and their adult children, all kinds of scary rumors abounded.
For instance, it was said that you signed the title to your house over to the bank and then you could live there until you died, and you got a monthly payment. Wrong.
Most people, now, are aware that a Reverse Mortgage is just special type of loan...and like with any other loan, the lender places a lien upon the security (in this case the home). Once the loan is paid off, the lien is removed. At all times the title to the property remains in the name of the owner/borrower.
The amount of the loan consists only of the financed upfront fees, the actual principle used, interest and mortgage insurance.
Another rumor was that they were too costly. But many analyses have been put out that show that the Reverse Mortgage is about 1% costlier than a regular forward mortgage that also has FHA insurance on it.
And for that 1% your can stay in your home as long as you desire, you have no monthly mortgage payments, (and may have a line of credit to use, and/or receive monthly payments) and you can never be foreclosed on.
It also means the lender may have to wait years to start receiving a return on their investment in your loan. So, is a higher cost justified? Everyone has an opinion.
But, make it personal, make yourself the lender. And, me the borrower.
If you were to lend me money to pay off my current mortgage, might also have to give me monthy payments and/or maintain cash on hand for me to have a credit line I may or may not use, and you didn't know when your principal and interest were to be returned, would you want more interest or less interest, more cost or less cost on your riskier investment in my mortgage loan?
People were also confused, thinking a Reverse Mortgage would be taxable, that it would negatively affect Social Security and pension benefits, as well as their eligibility for Medicare.
All of these assumptions are false.
Even a person who needs Medicaid can get a Reverse Mortgage and still receive Medicaid, as long as certain special procedures are followed. (It's best to work with an elderlaw attorney and your reverse mortgage specialist in that case.)
Still after all these years (the government Reverse Mortgage programs that are offered through HUD/FHA and called HECM's (Home Equity Conversion Mortgages) were officially available in 1989) rumors continue to persist.
Just today, surprisingly, I read the following on a current website that shall remain nameless.
While the question does not say you will wipe out your financial position, it certainly implies it. And it adds to fear, insecurity and negativity. And the implication is untrue."But remember, even though the loan [ a reverse mortgage] will come due only when you die, sell or move away permanently, it will have to be repaid somehow. Are you setting up a financial disaster that could wipe out your life's savings, your estate and leave heirs with financial obligations they cannot meet? "
It is true that your reverse mortgage must be repaid when you either sell your home or permanently leave the residence.
In the event of death, your heirs will have the choice of keeping the house and repaying the loan with liquid assets or a refinance conventional mortgage, or selling the house and using the proceeds to repay the loan.
However, the Reverse Mortgage is what is known as a NON-RECOURSE loan.
A loan that "has recourse" means that if the security for the loan - your home, for instance - does not have as much value as the loan, then the lender may attach your other assets, such as savings, stocks, pensions, IRA's, other property, etc. to get their money back.
In other words, the loan/lender has recourse to your other assets to get their money.
A NON-RECOURSE loan, means that the only security for the loan is your home. And only your home can be used to pay back the loan. NONE OF YOUR OTHER ASSETS CAN BE TOUCHED.
If , for some reason, your reverse mortgage grows to be larger than the value of your home, the lender cannot go after any of your other assets; absolutely none of them. (If there is fraud in the deal, by the borrower, all the good rules are thrown out.)
So what would happen, if upon your death you had $500,000 in a bank account, but the reverse mortgage on your home was larger than the value of your home?
Two things: one, the mortgage insurance your pay for, would pay the difference between what you owed and the value of the house to the bank clearing all debt.
And, two, if you have a non-insured loan (like the jumbo reverse mortgage) then the lender loses money on your loan. And, they cannot go after your other assets. That's why those jumbo loans cost more and have a higher interest rate.
But your heirs would have all of the $500,000 in your bank account, just as you wished.
It is very difficult and sad to still see these old and untrue rumors still floating about and frightening older borrowers who could truly benefit from a reverse mortgage; especially once you have seen, as I have, the benefits being enjoyed by reverse mortgage borrowers.
The truth is that the Reverse Mortgage is not the answer for everyone; but if someone does need it, they should have the chance to explore this option without undue negative influence.
And, again, I would like to remind potential borrowers: check out your lender! Make sure they are a legitimate bank, savings and loan, or mortgage broker.
Personally, the only complaints I ever get about the reverse mortgage from my clients is that they wish they had done it sooner.
No one has come to me with any complaints about the improvements in their life...sleeping better at night instead of worrying over finances, bills, the higher costs of food, medicine or the fear of losing their home.
Have a great day, everyone
Gloria
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