Reverse Mortgages Explained: Separating Facts from Fiction

Have you had reverse mortgages explained to you, but you never understood it? Are you wondering if you’re eligible for it? Reverse mortgages also known as Home Equity Conversion Mortgage (HECMs) have become increasingly popular in recent years. Due to this, there many misconceptions, sometimes referred to as myths or fictions, that have sprung up. Many people have had reverse mortgages explained in the wrong way and ended up losing thousands of dollars in scams. If you want to have reverse mortgages explained the right way, read through this article, and get a clear distinction between facts and fictions surrounding reverse mortgages.

Fiction #1: Reverse mortgages work the same way as other home loans

There is a big difference between HECM reverse mortgages and traditional home loans. Unlike traditional home loans, you get a reverse mortgage regardless of your credit rating or income. Besides that, you’re not required to make any payment on a reverse mortgage until you sell or move out of the home. However, you may make payment on the loan if you choose to do so. The loan is repaid from the proceeds of the sale of the home. Once the loan is fully paid off, the remaining money belongs to you.

Fiction #2: Reverse mortgages are too expensive

Reverse mortgages do not differ from other types of loans in terms of fees involved. Like most loans, you’ll have to pay a monthly servicing fee, recording fee, escrow fee, title fee, appraisal fee and an originating fee. The good thing about reverse mortgages is that you can pay these costs as part of the reverse mortgage loan. In some cases you have to pay an upfront FHA mortgage insurance premium, like if you select a traditional HECM standard reverse mortgage.

Fiction #3: Reverse mortgages are for elderly widows

This brings us to the question of ‘what is a reverse mortgage.’ A reverse mortgage is a loan offered to homeowners 55 years or older. It allows you to convert the equity of your home into a line of credit, monthly income or a lump-sum payment. It’s a great retirement strategy.  Therefore, saying that reverse mortgages are for elderly widows is not entirely true. Well, this category is included in the list of legitimate borrowers, but other categories of older people are eligible to take the loan.

Fiction #4: Your heirs and family will be responsible for the repayment of the loan

This is completely false because reverse mortgages are non-recourse loans. This is to mean that if the homeowner dies or leaves the home, the lender will sell the home at the prevailing market value to off-set the loan. Your heirs and family will therefore, not be required to repay the loan. However, if they want to keep the home, they can pay the balance in full to the lender.

Fiction #5: Reverse mortgage counseling is not important

The reverse mortgage process is comprehensive but easy to get through once you understand it. For instance, it’s quite challenging to estimate how long you’ll stay in your home. Ideally, a good lender will offer you unbiased counseling through an approved counseling agency. The counselor will take you through the pros and cons of these loans as well as the features and costs of different types of mortgages.