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Learn What’s True about Reverse Mortgages. And What’s Not!
More and more mature Americans are exploring reverse mortgages these days. For homeowners ages 62 and up, a reverse mortgage can be an excellent way to improve your cash flow to help cover expenses or improve your quality of life. Over the years we have found that it’s easy for people to get confused about reverse mortgages. Below are a few of the common misconceptions, along with a brief explanation about what is actually true.
- NOT TRUE: The lending institution actually owns the house in a reverse mortgage arrangement. This is not true. Borrowers still maintain ownership of the home under a reverse mortgage, just as with a conventional mortgage. But instead of the homeowner paying off the mortgage with monthly payments, he or she receives money periodically based on the equity that has been put into the home over many years. Because there is no change in title possession, homeowners must still pay property taxes, keep up with repairs, and maintain proper insurance on their home.
- NOT TRUE: Under a reverse mortgage, a homeowner will lose his or her home. Exactly the opposite is true. If homeowners remain compliant with the terms of the reverse mortgage (such as not renting the home out or living elsewhere for over six months in a given year), they can remain in the home for as long as they live or until they leave or sell it.
- NOT TRUE: Homeowners can’t qualify for a reverse mortgage if they don’t meet certain income requirements. There are basic income requirements for a reverse mortgage. Individuals must also meet the age requirement and have enough equity in the home in order to qualify. Whether a homeowner gets Social Security benefits, receives a pension or 401(k) distributions, profits from investments, or has no money coming in at all, the status of the person’s reverse mortgage application will not be affected.
- NOT TRUE: A reverse mortgage will affect seniors’ Social Security or Medicare benefits. In most cases, these entitlement programs will not be affected by funds received as a part of a reverse mortgage. However, the payment might affect the status of a person’s Medicaid eligibility if the individual gets more than $2,000 ($3,000 for a couple) in a calendar month and does not spend it by the end of that month. Reverse mortgage money may also influence a senior’s status under some Federal Supplemental Security Income or state entitlement programs.
- NOT TRUE: A conventional mortgage must be entirely paid off in order for a homeowner to qualify for a reverse mortgage. Homeowners 62 and over can still obtain a reverse mortgage even if they owe some money on their original mortgage; the reverse mortgage will refinance, i.e., repay, the conventional mortgage first. For example, if a homeowner qualifies for $100,000 under a reverse mortgage but still has $25,000 remaining on the home’s original mortgage, he or she will receive just $75,000 in payments.
- NOT TRUE: Under a reverse mortgage, the homeowner faces numerous restrictions on how he or she can spend the money. Funds received from a reverse mortgage can be used for anything. Period. For example, borrowers spend the money on medical bills, prescription drugs, home repairs, a new vehicle or a luxury item; pay off credit card debt, other loans; a vacation, remodel, a new car; set aside reverse mortgage funding for the purpose of future long-term care, additional investing or even a college fund for his or her grandchildren. Anything at all.
- NOT TRUE: A homeowner could be stuck with a huge bill at the end of a reverse mortgage if the home’s value depreciates. A reverse mortgage is known as a “non-recourse” loan, which means that the lender cannot demand a larger amount than the home’s value at the time of disposition. In other words, if the market value of the home falls below the amount of debt owed on it or if the occupant outlives the life of the reverse mortgage, then he or she is only required to pay back an amount equal to the value of the home. This is actually one of the main advantages of a reverse mortgage.