Misconception #1: A reverse mortgage is not a loan.
The reverse mortgage is secured by a deed of trust or mortgage, much like a traditional 'forward loan'. If you were to borrow money to purchase a home or to refinance your present home, the lender does not take your house. You sign a note and mortgage with your property serving as security. The reverse mortgage is secured in exactly the same way. The main difference is that you do not have to make monthly repayments to the loan balance. This causes the loan balance to grow larger over time whereas a conventional loan balance will reduce over time.
Misconception #2: I will not be on title/the bank owns my home.
A reverse mortgage simply creates a lien against your property much like a forward mortgage but with separate repayment requirements. You remain on title as long as you choose, provided you meet the terms of the loan agreement. The loan will not become due as long as you continue to meet loan obligations such as living in the home, maintaining the home according to the Federal Housing Administration (FHA) requirements, and paying property taxes, homeowners insurance, and HOA dues, if applicable.
Misconception #3: This loan will affect my Medicaid/SSI.
Typically, the proceeds from a reverse mortgage loan do not affect Social Security or Medicare benefits. It is your money to spend as you please; as an added bonus, it’s tax-free*! However, if you are receiving other types of state or local government benefits, you should discuss with a representative of that agency your plans to obtain a reverse mortgage. Be sure to explain how you plan to receive the money from the reverse mortgage so that they can provide guidance to ensure that the proceeds from the reverse mortgage will not have a negative impact on those Medicaid/SSI benefits. Please note, we always recommend that you consult with your tax advisor or financial planning professional.
Misconception #4: The children will lose their inheritance.
Historically, we know that most houses continue to appreciate over time; a high percentage of houses still have enough equity to pass down as inheritance. Since you still own the home and retain title with a reverse mortgage, you have the opportunity to leave the property to whomever you choose. Depending on a number of factors including: how long the reverse mortgage is active; the amount of withdrawals you request; the interest rate and other charges; and the valuation of your home at that time, your equity in the home is subject to increase or decrease. We will provide you with an amortization schedule that gives you a guideline on how the fees, interest and appreciation may affect the equity. In any event, neither you nor your heirs will ever owe more than the value of the property. If there is equity remaining in the property, your children will likely elect to either refinance or sell the home to pay off the reverse mortgage and retain the equity. If, however, the loan balance exceeds the value of the property, as a reverse mortgage is a non-recourse loan, the additional amount is “forgiven”.
Misconception #5: I'm going to owe more than what my house is worth.
The reverse mortgage is a non-recourse loan. This means that you will NEVER have to repay more than your home is worth, nor will your heirs/estate. While the loan balance can exceed the property value, neither you nor your estate will ever be obligated for more than the property value. The amount required to repay the debt is always the lesser of the value of the property at the time of repayment or the loan balance.
Misconception #6: There has to be something you can do to lower the insurance fee (IMIP).
The Initial Mortgage Insurance Premium (IMIP) is a fee assigned by the Federal Housing Administration (FHA) and, unfortunately, the lender has no authority to reduce or waive this fee. The IMIP enables FHA to guarantee the loan and provides the investor assurance they will not suffer any loss by investing in this loan. This insurance fund is what covers the shortfall, if the loan balance exceeds the value of the property at the time of repayment (see misconception #5).
Misconception #7: The costs of the loan are too high.
You are correct, the reverse mortgage loan is not inexpensive. However, when you compare it to other loans, the benefits may outweigh the costs including the ability to finance all the closing costs (little to no out of pocket expense to you). The major benefit, of course, is not having to make repayments to the loan balance*. In the long term, assuming you keep the reverse mortgage for the remainder of your life, the costs may be comparable to a forward loan with the extra benefit of not having to make monthly repayments as long as you occupy the property as your primary residence and continue to meet the terms of the loan agreement.