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REVERSE LOAN MYTHS
As reverse mortgages have increased in popularity, so have the myths about these unique loans. While there is better information available today, many seniors and their adult children who are exploring reverse mortgages still encounter a host of misconceptions. Here is a look at common myths and the facts associated with the myths.
The bank takes the house or the borrower can lose the house.
With a reverse mortgage, the borrower retains title throughout the life of the reverse mortgage. The borrower cannot as a result of the reverse mortgage, be forced out of the home as long as property taxes and insurance are paid and the home is maintained in a reasonable living condition. Once the borrower permanently moves out of the home, the loan must be repaid. Most properties secured by reverse mortgages still have equity when a maturity event occurs; the borrower or their heirs can opt to sell the home to repay the loan and preserve this equity for the benefit of the borrower or his/her estate.
The home must be paid off or be debt free to qualify.
Reverse mortgages convert home equity into cash. As long as there is sufficient equity in the property, the homeowner may be eligible for a reverse mortgage. In fact, many seniors use a reverse mortgage to pay off the existing mortgage.
When the reverse mortgage becomes due, the bank sells the home.
The borrower is in control of the home and retains title, not the bank or the lender. While it is common for the borrower or their heirs to sell the home to repay the loans, it is a decision that they make. They might instead refinance the home to repay the loan.
It is cheaper to move to a smaller house.
Seniors need to analyze their costs carefully before making this assumption. Selling a home and moving can be expensive. The typical real estate commission of six percent, combined with moving expenses, can make finding a new home a serious financial undertaking.
Children want the home or don’t feel comfortable with their parents obtaining a reverse mortgage.
Seniors should talk with their family about reverse mortgages. Often adult children are pleased that their parents have a financial solution available to help them live more independently and financially secure.
The borrower could owe more than the home is worth.
Due to built-in safeguards, the borrower or his estate can never owe more than the value of the home upon repayment. In addition, the HECM products are insured by The Federal Housing Administration.
Reverse Mortgage processes will impact Social Security and medical benefits.
Generally, a reverse mortgage will not affect regular Social Security payments or Medicare benefits, although some Federal Supplemental Security Income of state programs may be impacted. Borrowers should speak with a financial advisor or the appropriate agencies.
There are restrictions on how the money is to be used.
Actually, there are no restrictions and the proceeds from the reverse mortgage can be used for any purpose such as travel, to pay debt, medical expenses or just to live more comfortably.
Once proceeds are received, taxes will need to be paid.
Since the proceeds are already the borrower’s money, they are tax free. Consult your tax advisor.
Reverse Mortgages are only for seniors in need or for the “house rich, cash poor”.
Reverse mortgages are excellent financial planning tools that have been used by homeowners from all walks of life to enhance their retirement years.