I recently read a press release (masquerading as a “news article”) in which one reverse mortgage lender aimed to refute 10 carefully selected reverse mortgage myths. While the refutations are certainly accurate, many of them struck me as unfair, and were deliberately worded so as to be easy to refute. Thus, I’d like the opportunity to refute their refutations.

Myth: If I take out a reverse mortgage the lender will own my home.

While this is not legally the case (the title still belongs to the borrower, who retains his rights as the homeowner), it can quickly become so financially. Those that borrow the maximum they are entitled to will quickly discover that they own less than half of the value of the home, and that their equity will continue to fall (both in nominal and relative terms) over the life of the home, such that when the loan matures, the lender will be entitled to the majority of the proceeds. In addition, the lender can force the premature sale of the property if the borrower fails to maintain the property and/or pay property taxes.

Myth: My children will be responsible for the repayment of the loan.

If your children want to keep the property after the borrower (you) dies, they MUST repay the loan. Otherwise, the lender has no basis, legal or otherwise, for contacting the children of the borrower.

Myth: I cannot get a reverse mortgage if I have an existing mortgage.

Borrowers with high LTV primary mortgages (perhaps 75%) will find it very difficult if not impossible to obtain a reverse mortgage, especially as a result of the recent lowering of FHA lending maximums. For those whose primary mortgage are close to being repaid, this myth is indeed a myth, and they can in fact use some of the proceeds from the reverse mortgage to repay the primary mortgage.

Myth: Only low-income seniors get reverse mortgages.

If this myth was reworded to read that “Only low-income seniors SHOULD get reverse mortgagesit would no longer be a myth. While it is true that income is not a factor when applying for a reverse mortgage, those whose financial/income positions are strong would have no reason to consider a reverse mortgage. In the event that one’s income declines or ceases, then one would perhaps have a basis for considering a reverse mortgage.

Myth: If I outlive my life expectancy, the lender will evict me.

It’s true that the lender would have no legal basis for doing so, under the terms of the loan. It’s worth pointing out, however, that loans are structured according to actuarial assumptions, such as life expectancy. Thus, if you outlive your life expectancy, you can expect your (heirs’) equity in the home to be even less than otherwise. The only point I’m trying to make here is that there is no free lunch by living longer, since the loan will accumulate interest until it is repaid.

Myth:  Reverse mortgage lenders pressure seniors to buy additional financial products.

While I’d like to believe that the majority of reverse mortgage lenders don’t engage in so-called cross-selling, more than a handful of lenders apparently do, necessitating new legislation to ban the practice.

Myth:  There are no objective advisors available to seniors trying to decide if a reverse mortgage suits their needs.

Thanks to recent FHA legislation, this myth can be firmly declared a myth. Borrowers are now required to undergo counseling with an FHA-approved adviser prior to obtainingthe reverse mortgage.

Myth: There are restrictions on how reverse mortgage proceeds may be used.

It is unfortunate, in my opinion, that there aren’t restrictions. While borrowers (and especially lenders, for marketing purposes) are probably happy that they can use the proceeds of a reverse mortgage for “frivolous” expenditures, they will probably regret this leniency in hindsight, when genuine financial necessity arises and/or they have very little equity left in their homes.

Myth:  Reverse mortgage lenders take advantage of seniors.

As with the “myth” about cross-selling, I’d like to believe that the majority of reverse mortgage lenders do not try to exploit their customers and are simply fulfilling legitimate demand for the service that they are providing. The reality, however, is that reverse mortgages are inappropriately marketed (and often sold, it seems) to customers that simply do not need them. While such borrowers still have every right to obtain reverse mortgages – this being a free country – it is arguable that lenders exploit their ignorance.

Myth: I’ve heard I won’t qualify for a reverse mortgage because of my limited income.

This is basically a restatement of an earlier myth, and it seems it was added by the lender solely to underscore the eligibility of low-income borrowers. What was I just saying about exploitation?

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