Reverse Mortgage Facts and Myths
There is no need to be a detective!
Joe Friday in Dragnet said, “Just the Facts, Ma’am” and that’s what you’ll get from Colorado Reverse Mortgage. My name is Mace… I carry a badge.
The badge I carry is really just a fancy pin to show that I’ve earned a Certified Reverse Mortgage Professional (or CRMP) designation. As a CRMP, I have had the opportunity to visit with many seniors and their advisors over the years and have come across many misconceptions that surface time and time again. Some of these are simply myths that been around for decades and more frustratingly is other misinformation that unfortunately comes from Loan Officers, family friends and neighbors that claim to know all about Reverse Mortgages but only have limited experience and are giving wrong info. Based on these conversations with seniors, their children and their advisors, I have compiled a list of common Reverse Mortgage Myths and Facts.
Myth #1: You no longer own your home... the Bank or Government does!
Fact: This, by far, is the biggest misconception and if I only had a nickel… Today, 6 out of 10 people we meet initially have this wrong idea. That is actually an improvement from a few years ago when it was 8 out of 10 people. Think about it… More than half the folks we meet think that they are considering giving their home away! Nothing could be further from the truth. To be crystal clear… You are still on title and still own your home. Should you decide to move, you can sell the home. Otherwise, the home will likely pass to your heirs as you direct in your Will or Trust. Of course, if you’ve read this, then the ratio will continue to improve over time and in the next few years, I hope to squash this and other reverse mortgage fallacies.
Myth #2: The home must be “Free & Clear” to qualify.
Fact: About half of Reverse Mortgage transactions have an existing lien or mortgage that is paid off with the proceeds! Wouldn’t you like to be free from the burden of making a monthly mortgage payment for the rest of your life?
Myth #3: A good Financial Planner would advise against completing a Reverse Mortgage.
Fact: In actuality, the opposite is true! The Financial Planning Association (FPA) supports a Reverse Mortgage strategy for a senior’s retirement. They see it as a risk management tool to use in conjunction with a two-bucket investment strategy in order to help meet a retirement goal.
Myth #4: The Closing Costs of a Reverse Mortgage are really high.
Fact: Closing costs are a fact of life and there are strategies that may allow the costs to be significantly reduced. The situation and structuring of the Reverse Mortgage will dictate what costs will be incurred. Other than the Appraisal cost, the other costs are typically rolled into the loan. Third party costs, such as title work, appraisals, etc. may vary by region or complexity, so call us for an estimate of your closing costs. You should be able to quickly determine if the benefits outweigh the expense.
Myth #5: You no longer need to pay property taxes.
Fact: As is true with all homeowners with a mortgage, you must continue to pay for property taxes, homeowner’s insurance and maintenance.
Myth #6: If your home is in a Trust, you must remove it from the Trust to qualify.
Fact: You do NOT need to remove the home from your Revocable Living Trust in order to close on a Reverse Mortgage. Many lenders will tell you to remove it temporarily from the Trust while they work. That is lazy thinking by them and may put you (and your estate) in a hazardous position.
Myth #7: Reverse Mortgages only work if you already own a home.
Fact: The “HECM for Purchase” program has been around for years. However, most people (including many experienced real estate professionals) do not know how to buy a home with a Reverse Mortgage.
With no monthly payments, qualifying is straightforward. Rely on us as your local experts to learn more or to have us speak at your next function. Click here for more information.
Myth #8: My Social Security and Medicare benefits will be affected by a Reverse Mortgage.
Fact: The money produced by a Reverse Mortgage does NOT affect Social Security or Medicare. In fact, some seniors think outside the box and temporarily use a Reverse Mortgage Strategy to delay their Social Security benefits. This can significantly increase their government benefits in the future.
However, if you are on Medicaid or other government assistance, speak your Medicaid Counselor or other representative to learn if your benefits will be affected. A Reverse Mortgage can still be established and will change your life, but we need to set up the loan terms carefully and can work with the Medicaid Counselor or Administrator.
Myth #9: Manufactured Homes do not qualify for Reverse Mortgages.
Fact: Many lenders won’t lend on Manufactured Homes. We do! With about half the homes in Colorado classified as a Manufactured Home, it would be a shame if we didn’t.
The double-wide home must be on a permanent foundation and there are other guidelines that apply. We have an entire web page dedicated to the intricacies and recommend you check it out. Click here to open the Manufactured Homes in Colorado page.
Myth #10: Both spouses must live in the home to qualify.
Fact: If your partner is in a nursing home or assisted living facility, you have concerns… emotional and financial. A Reverse Mortgage may ease the financial obligation incurred each month and help you sleep better at night.
Myth #11: Reverse Mortgage proceeds are only paid out on a monthly basis.
Fact: Receiving money monthly is only one way you can receive money. You may also receive it in the form of a Line of Credit where funds are dispensed only when you want it and for the amount you want. Finally, you may receive funds in a “lump sum” distribution.
Or, if you can’t decide… You have the option to combine the 3 methods of disbursement!
Finally, one of the greatest features about a Reverse Mortgage, is that you have the ability to make changes at any time in the future. The program is incredibly flexible and you are able to manipulate the terms after closing whenever you want.
Myth #12: Reverse Mortgage proceeds are going to be taxed.
Fact: Generally, the proceeds are tax-free!
Think of it this way… You worked hard for many years to build equity in your home. The money you used to buy your home was already taxed. So, all you are doing is pulling your own money back out of the home. Loan proceeds are not taxable, because it isn’t considered as “income”; even if you receive a Reverse disbursement each and every month.
Your situation may be unique or you may be receiving other benefits (such as Medicaid) that could be affected, so we always recommend checking with your tax, financial or benefits advisors. Rely on local experts to learn more or to have us speak at your next function.
Myth #13: Your kids (or estate) won’t inherit the home.
Fact: Upon the death of the last person on the Reverse Mortgage, the home does pass on to whomever you’ve chosen to inherit the property. Your heir(s) will then decide if they want to refinance to keep the home, sell it and keep the proceeds, or turn the house over to the lender.
Myth #14: If I live longer than expected, the lender will evict me.
Fact: As long as you are paying the property taxes, homeowners insurance, maintaining the home and living in it as your primary residence, there is no time limit as to how long you can stay in the home.
Myth #15: If the mortgage grows larger than the value of the home, the lender will evict me.
Fact: Rest easy… A Reverse Mortgage is a “non-recourse” loan and is insured by the government.
Simply, no one is responsible for any amount over the value of the home. If the bank takes a loss on the transaction, they submit a claim to HUD / FHA to be reimbursed.