Since the last few posts dwelt exclusively on the harms and pitfalls of reverse mortgages, it seems that in the interest if fairness, I should shift the focus to some of their positive attributes. For ease of transition, I think it makes sense to debunk a few misconceptions, in order to transform perceived drawbacks into benefits.

The first, and most common myth, is that in entering into a reverse mortgage, you no longer own your home. According to this line of thinking, the bank gives you cash in exchange for the title to your home; the only twist is that you get to remain in your home until you die. In reality, this is simply not the case. A reverse mortgage is equivalent to a lien, which in legal terms, means that another party (the lender, in this case) owns a stake in your home. You still retain title to your home, and in fact, you can return to being the sole owner if/when you repay the reverse mortgage.

Therein lies the second myth- that a reverse mortgage is permanent; once you enter into it, there is no way of exiting. In fact, a reverse mortgage is mechanically no different than any other loan, in that it must ultimately be repaid. Granted, a reverse mortgage is somewhat unique, because you can use the proceeds from the future (posthumous?) sale of your home towards repayment. That doesn’t mean, however, that you can’t simply repay the loan prior to selling the house. Just make sure you read the fine print to understand the terms of the loan, especially regarding possible prepayment penalties.

Yet another myth is that to secure a reverse mortgage, you need great credit, just like when applying for a conventional mortgage. Nothing could be further from the truth. Reverse mortgage lenders couldn’t care less about your personal financial situation. In fact, the whole point of reverse mortgages is to help those most in need of cash, especially those that have no other options. The primary factor in evaluating an reverse mortgage application is the quality of the home that is being mortgaged. The better the home, the better the prospects are for appreciation, and the more money you can borrow via a reverse mortgage. In this sense, the keystone of the reverse mortgage process is the appraisal – not the credit report. Prevailing interest rates and the age of the borrower will also influence the maximum loan size, but are less important than your collateral (the house!).

The final myth is that your original mortgage must first be paid off before entering into a reverse mortgage. Again, this is completely inaccurate. In fact, many borrowers use reverse mortgage for the main purpose of paying down/off their existing mortgage balance. It’s even possible to maintain a conventional mortgage and a reverse mortgage at the same time (though this isn’t advisable in most cases). The FHA, which insures most reverse mortgages, has certain threshold requirements, but these can be bought down with excess cash. In other words, you can dip into your savings to pay down your original mortgage to the level stipulated by the FHA, and then immediately use the funds from a reverse mortgage to replenish your savings account.

There is a tremendous amount of misinformation surrounding reverse mortgages, which means that I could continue. I think I’ll stop here for now, and pick up when I receive some feedback from readers. I invite you to leave a comment if there is an aspect of reverse mortgages that you aren’t quite clear on, and/or there is a myth that you hope the staff at can help you shatter!

2 Responses to “Debunking Reverse Mortgage Myths”

  1. Jack Willett Says:

    Friends of the family would like to occupy he residence full time in addition to our being there in the summer. They will pay all maintenance and repair expenses and we will not collect rent or lease payments from them. Since we will also occupy the premises six months out of each year, will we remain in compliance with the reverse mortgage?

  2. Ron Sylvia Says:

    I’am told like in the 1930’s during the depression the bank forced homeowners to “pay-up” by making the mortgage due, especially if the bank was under pressure and/or was going under. With a reverse mortgage can a bank repossess the reverse mortgagee’s home by forcing them to pay back the bank if the homeowner is unable to repay? Ostensively, the bank could then repossess the home. Is this a possibility?
    Ron Sylvia

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