Reverse Mortgages are not well understood by many homeowners, financial planners, investment advisors, accountants or attorneys. As a result, they do not understand that Reverse Mortgages can provide the following benefits:
- Supplement and manage retirement income and increase monthly/annual cash flow;
- Maintain and build wealth in retirement;
- Free up capital when purchasing a new home in retirement;
- Manage tax liabilities more efficiently and at a lower overall cost;
- Help people remain in the home without the fear of being forced to move due to financial reasons;
- Provide significant benefits for surviving spouses;
- Offer a source of capital and liquidity for needs such as home improvements, healthcare costs and possibly long-term care. The frame of reference most people have for a Reverse mortgage is from 10 to 15 years ago. Beginning in 2012 and continuing through 2018, Reverse mortgages have transformed from a product of last resort to a key component of an individual retirement income strategy. People attempt to compare a Reverse mortgage to other mortgage products when in fact they are more akin to insurance or a financial product that can provide capital and liquidity in retirement. Lastly, a Reverse mortgage can provide the peace of mind that a homeowner can remain in their current home for as long as they want. In the rest of this article we are going to address common misconceptions and myths that still exist regarding Reverse mortgage even though they have been substantially modified over the past 6 years. These myths and the lack of understanding unfortunately prevent many people who could benefit, from finding out the facts about how a Reverse mortgage may be able to help them.
MYTHS VS FACTS
MYTH #1 – A Reverse mortgage is a loan of last resort for desperate people.
FACT: Reverse mortgages have evolved from strictly a needs-based product to a solution that many financial planners recommend as an important component of a comprehensive retirement plan and a retirement income strategy. Many people who are very well-off get Reverse mortgages for a variety of reasons, including supplementing income, increasing liquid assets, extending the life of their assets, minimizing income taxes, and gaining additional financial flexibility in retirement.
MYTH #2 – When you get a Reverse mortgage, the Bank owns the home, you no longer do.
FACT: This is by far the number one misconception that people have. I have had financial planners, attorneys and CPA’s state this as a reason to not do a Reverse mortgage. The truth is the homeowner retains title and 100% ownership with a Reverse mortgage.
MYTH #3 – The bank gets your home when you pass away and not your children or other beneficiaries.
FACT: When a homeowner passes away, their ownership interest goes into their estate or is transferred to the joint tenant the same as if there were not a Reverse mortgage on the property.
MYTH #4 – My kids or other beneficiaries will be on the hook for a big liability.
FACT: Borrowers can leave their home to their kids or other beneficiaries. When the borrowers pass away, the beneficiaries may either pay the balance due on the Reverse mortgage and keep the home or they may sell the home and use the proceeds to pay off the reverse mortgage. They will never pay more than the house is worth. If they sell the home, any remaining equity after the Reverse mortgage is repaid is theirs to keep. This is no different than what happens with a property that has a regular mortgage.
MYTH #5 – The bank can foreclose if you owe more than the house is worth.
FACT: The only requirements to remain in the home are that the property taxes and insurance are paid, the HOA dues (if applicable) are current, the house is reasonably maintained, and that the last surviving borrower or an eligible non-borrowing spouse does not vacate the house for more than 12 consecutive months. Even if you owe more than the house is worth, the bank CANNOT foreclose if you continue to meet these requirements.
MYTH #6 – My spouse can be forced to move out of the home if I die.
FACT: Borrowing spouses and eligible non-borrowing spouses can remain in the home after the co-borrower or the primary borrower passes away. The spouse only needs to continue to meet the conditions of the loan (see item 5 above). In many ways this provides more protection than a regular mortgage. This factor is one of the prime non-financial benefits of a Reverse mortgage.
MYTH #7 – I cannot ever sell my house if I have a Reverse mortgage.
FACT: While a Reverse mortgage is better suited for people who don’t plan to sell anytime soon, if circumstances change and you do need to sell, you can. You simply sell the home, pay off the balance with the proceeds of the sale, and the remaining equity is yours to keep. No different than any other mortgage. Also, a Reverse mortgage does not have a prepayment penalty.
MYTH #8 – Social Security and Medicare will be affected.
FACT: A Reverse mortgage will not have any effect on your Social Security payments or Medicare benefits. However, there could be an impact on Medicaid or other public assistance programs that are means tested. Talk to your adviser to make sure you fully understand the impact if you have means tested benefits.
MYTH #9 – I will have to pay taxes on the money I get from a Reverse mortgage.
FACT: The proceeds from a Reverse mortgage, whether paid in a lump sum or periodically, are not subject to income tax. Consult a tax advisor for more information.
MYTH #10 – Reverse mortgages are extremely costly.
FACT: This is subjective since the fees will vary depending on the type of Reverse mortgage selected and the strategies that are being pursued. In some cases, the costs will be higher than a traditional mortgage but it should be remembered that the benefits can be much more significant than a traditional mortgage as well. A cost benefit analysis can only be analyzed once there is an understanding of the benefits that can be derived. In most cases, the borrower will include the costs associated in the loan amount and will not have any out-of-pocket costs.
MYTH #11 – Reverse mortgage interest rates are higher.
FACT: Reverse mortgages are guaranteed by the Federal Housing Authority (FHA). FHA interest rates on a Reverse mortgage are very comparable to traditional mortgage rates.
MYTH # 12 – Reverse mortgages have hidden risks that can cost you your home.
FACT: This is a catchall myth. The terms of a Reverse mortgage are very clear. A borrower must pay their property taxes, homeowner’s insurance, keep the property in good repair and must maintain the property as their primary residence. These obligations are not hidden. In fact, for anyone carrying a regular mortgage, with monthly mortgage payments in retirement, I would argue that a regular mortgage carries substantially more risk of losing the house than a Reverse mortgage.
The last myth to discuss deserves its own section because in some ways it is the least understood part of a Reverse mortgage but may be the most significant benefit. Often people hear or believe the following.
MYTH #13 – A Reverse mortgage will use up all my equity and reduce the amount available for inter-generational wealth transfers to my kids, grandkids or other beneficiaries.
FACT: The common belief is that a Reverse mortgage reduces equity, thereby reducing the value of the estate for the homeowner’s heirs and this is presented as a negative. Current research and thinking on Reverse mortgages show this is not necessarily the case:
- The belief that equity is reduced is often not true since the amount of the mortgage, the length of time it is outstanding, and the appreciation rate of the house could result in an increase in equity;
- Even in situations where the equity is reduced this is not a weakness, it is by design. A basic underlying philosophy of a reverse mortgage is that the homeowner can make better use of their equity than their heirs or other beneficiaries. This can allow them to be self-sufficient and in a better position to fund their retirement, enhance their quality of life, and effectively manage all their assets.
- When used in a strategic manner, the use of a reverse mortgage can result in a greater ability to pass on wealth since it can be used to preserve other financial assets that can continue to grow.
The desire to preserve home equity is often a psychological constraint that people impose on themselves which can lead to a less efficient retirement. Under the concept of retirement income efficiency, home equity and other financial assets are equivalent, and they should be looked at in total rather than in isolation. While taking money from the Reverse mortgage may reduce the home-equity component, it does not necessarily reduce the overall net worth or value of the total assets since other financial assets can grow rather than be drawn down.
Retirement-income efficiency is defined as: using assets in a way that allows for more spending and/or more wealth over time.
If you are interested in finding out about some of the benefits of a Reverse mortgage click on this link for another article that outlines the benefits and how and why people use them. If you have interest in discussing reverse mortgages, contact Wayne Tucker at 303-468-1985 or at email@example.com.