Busting Myths and Misunderstandings About Reverse Mortgages
BY: Cindy Mack
Begin With the Right Reason
- 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.
Who Qualifies for an HECM Loan?
- 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?
- 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.
- 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.