You’ve seen those TV commercials with aging celebrities talking about reverse mortgages, but what exactly is a reverse mortgage? A reverse mortgage is a general term to describe a group of FHA-insured home loans that allow seniors to tap into the equity in their home to help fund their retirement. Some people are skeptical about reverse mortgages, so let’s clear the air by dispelling some of the myths about this retirement strategy that is growing in popularity.
Myth #1 – Reverse mortgages are only used as a last resort by senior citizens who have run out of retirement funds. Though partially true, that’s not the whole story!
It was recently reported by NBC Evening News that half of people over 55 have little or no retirement savings, which is why some seniors do indeed use reverse mortgages to extend their retirement income. In fact, reverse mortgages may become a common tool for millions of retirees who are tired of squeaking by on their Social Security. Taking out a tax-free loan against the equity in their homes can, in some cases, eliminate a mortgage payment, and give financially-strapped retirees some relief.
On the other hand, reverse mortgages can also be used as an estate planning strategy. Some people are electing to take out a reverse mortgage on their homes to travel or further enjoy their retirement, and at the same time are paying for a life insurance policy that will pay off the reverse loan after they have passed away. Thus, they can leave the home to their children. Others may opt for using a reverse mortgage as an income source during a downturn in the stock market, and then pay it back when the market recovers.
Myth #2 – Reverse mortgages are complicated. Not!
A reverse mortgage is like any other loan—you simply take out a line of credit against your home equity and use the tax-free funds for a wide range of items: groceries, household bills, a car, medical expenses or even a trip. (Exception: you will have to pay taxes if the money is used to earn interest.) Your only requirements for a reverse mortgage are to:
• Be age 62 or older
• Make the home your primary residence
• Maintain your home according to FHA requirements
• Pay property taxes
• Pay homeowners and mortgage insurance
• Attend a HUD-approved counseling session, to make sure you thoroughly understand the loan process.
Myth #3– Reverse mortgages aren’t a good product. Wrong! They just keep getting better!
In recent years, the Federal Housing Authority has improved the reverse loan product and tightened the requirements, making them even more attractive. One change made in January 2015, allows the spouse of the borrower to remain in the home when the borrower passes away. Also, now the eligibility and cost of reverse mortgages are tied to risk, which makes them safer for the bank and the borrower.
Myth #4 – My heirs will be disappointed if I take out a reverse mortgage. “It ain't necessarily so!”
Many adult children are encouraging their parents to look into taking out a reverse mortgage on their homes in order for them to remain financially independent. No one wants to see their parents struggle and not enjoy their lives after having worked so hard for so many years. A reverse mortgage is the answer for many people who have paid off their home and/or have a nice amount of equity due to increased home value. The borrower still owns the title to the home, and when they pass away, their heirs inherit any remaining equity after paying off the loan. And, heirs are never required to pay more than the value of the home.
Hopefully, this information helps you better understand how reverse mortgages work. You just might find that this financial tool, created to help seniors stay in their homes, might be just the ticket to help you enjoy your retirement years more fully.
To ask questions and/or to receive a free copy of a sample reverse mortgage quote package, {{page:3601, text: Contact Amber Rainford}}.
