Common Misconceptions About Reverse Mortgages
“The Equity is used up and my children & grandchildren will lose out.”
In contrast, by doing a reverse mortgage, in most cases, the home will be kept for a longer period of time. This will usually result in more equity increase, hence more value for the home. For example, using a 5-7% conservative appreciate rate on a $300,000 home, the increase in value would be $15,000 annually. By using the reverse mortgage as a tool in this way, not only will keeping their home longer increase the quality of life for the senior, but will also allow the greatest asset they have to continue to appreciate (hence, increase in value). Thus, it is typical for the increase in the appreciated value to be a great benefit for the senior, and later the heirs. It is a win-win situation that most are not quite aware of.
“It’s cheaper to move to a smaller house.”
While there can be pros and cons to downsizing, costs need to be carefully analyzed, before making this assumption. The costs of selling a home will be typically 8-9% of the sales price. For example, on a $300,000 home, closing costs and real estate commission can total close to $27,000.
Surveys show that most seniors, if given a choice, would prefer to stay in their own home, where they are more comfortable and familiar. Many seniors, with the support of their families, are using the reverse mortgage to pay for “in-home care”, which can be less expensive than nursing home costs. Hence, the reverse mortgage creates an investment advantage by being able to keep the home longer, and most importantly, allows the senior to stay at home for the remainder of their life.
“My Income Tax will Increase, and the reverse mortgage will affect Social Security or Medicare benefits.”
The cash proceeds from a reverse mortgage are tax-free because it is already your money. Also, a reverse mortgage will generally not affect regular Social Security payments or Medicare benefits. It is recommended that the borrower speak with his or her financial advisor and appropriate governmental agencies.
“The bank could take my house OR I could lose the house.”
As with any mortgage, it would be impossible for the borrower to lose the home, providing property taxes and insurance are paid. The borrower retains title to the home throughout the life of the reverse mortgage. Once the last borrower permanently moves out of the home, the loan must be repaid.
“I could end up owing more than the home is worth.”
The safeguards for the reverse mortgages is structured so that the borrower or his estate can never owe more than the value of the home upon repayment. In addition, the HECM reverse mortgage program is insured by the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development (HUD).