Busting Myths and Misunderstandings About Reverse Mortgages

BY: Cindy Mack

Home Equity Conversion Mortgages (HECMs)—commonly known as reverse mortgages—are suffering from an identity crisis, riddled by myths and misunderstandings. In truth, a Home Equity Conversion Mortgage can be a powerful tool for helping you reach your financial goals.

Like any loan or investment, the key is to use this tool wisely with the help of a partner you trust.

Begin With the Right Reason

To get the most out of any financial tool, you should know and understand your goals. Some excellent reasons to tap into an HECM loan include:

  • Eliminating monthly mortgage payments to help manage a limited monthly income.
  • Make retirement savings last longer or delay social security benefits to help them grow.
  • Use a HECM line of credit to manage cash flow issues or short-term setbacks.
  • Support aging in place by covering expenses for home modifications or caregiver costs.
  • Purchase a new property that better meets your needs.
Your reason will be personal to your situation, but the tool should match your goal. An experienced loan officer can explain the benefits and challenges of each loan option—and also know all the options available to you.

Who Qualifies for an HECM Loan?

As an FHA-insured loan, HECMs are a safe and legitimate way to use a portion of your home equity. However, Home Equity Conversion Mortgages aren’t available to everyone. To be eligible:

  • Age. The primary borrower must be at least 62 years old. A “non-borrowing” spouse can be younger.
  • Ownership. You must own your home.
  • Residency. You need to live in your home as the primary residence. For instance, you can’t take out an HECM on a rental property you own.
  • Program requirements. Like any other mortgage or Home Equity Line of Credit (HELOC), you need to meet the basic financial requirements of the HECM program.

How Does an HECM Work?

A reverse mortgage is actually a home equity loan, which means you are borrowing against the equity you’ve built up over time as you paid down your mortgage. In other words, you’re borrowing money from the portion of your house you’ve already paid for.

Depending on several factors, including whether you still hold a mortgage on your home or your house is already paid off, a Home Equity Conversion Mortgage can be paid out to you in any of the following ways:

  • Elimination of your monthly mortgage payment to free up money for other things, OR
  • A monthly installment into an account that grows over time if you don’t use it all, OR
  • A lump sum that can be used all at once.
The money from the loan is tax-free cash; however, you still need to continue paying property taxes, homeowner’s insurance, and maintain your home in good condition. Talk to your tax advisor to understand how an HECM will affect your individual situation.

The HECM can remain in effect for as long as the property remains the borrower’s primary residence and you continue to comply with all the loan terms.

If you move, the HECM will become due, just like any other mortgage.

Common Myths

All financial tools can be used either correctly or improperly. For example, you shouldn’t take out a traditional mortgage beyond what you can afford or invest in riskier stocks too close to retirement age. It’s important to get all the facts about an HECM from a local bank you trust in order to determine if this type of home equity loan is the right fit for you.

Some of the most common misunderstandings we hear about HECMs include:

  • Will the bank own my home if I take out an HECM? You retain ownership of your home, just like with any other mortgage or home equity loan.
  • What if I want to sell my home someday? Like every other mortgage, a reverse mortgage becomes due and payable when the property is sold or whenever the borrowers leave the home (the borrower must maintain the home as their primary residence). There is no prepayment penalty or any restriction on selling the property at any time as long as you can use the proceeds to repay the mortgage.
  • Will a reverse mortgage affect my social security, Medicare, or pension benefits? Yes and no. Reverse mortgage funds are considered loan proceeds and not income. In some circumstances, Medicaid and other income-based benefits may possibly be affected. Your loan officer should be able to tell you where you can find those answers. A big positive effect, though, is that a reverse mortgage may help you delay accessing Social Security benefits in order to boost your lifetime monthly benefit.
  • With a reverse mortgage, will I be passing along debt to my heirs? A reverse mortgage is a non-recourse loan, so no debt over-and-above the value of the property can be passed on to the borrower’s heirs. If the loan repayment has not been satisfied by the property value, the remaining loan is forgiven. Just like any mortgage loan, it’s important to borrow responsibly.
  • Is a reverse mortgage a last resort? HECM loans have become a tool for all types of smart and responsible financial planning. Talk to your financial advisor about ways a reverse mortgage may fit into your retirement planning.
If you would like more information about Home Equity Conversion Loans, call me at State Bank of Cross Plains at (608) 826-3513.

Cindy Mack

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