Why the Bad Rap? Reverse Mortgage Facts to Set the Record Straight

Wondering if a reverse mortgage is right for you or an older homeowner you know? More people are becoming aware of reverse mortgage loans as a way to tap into home equity. However, when it comes to weighing your options, it's important to be aware of reverse mortgage facts to separate truth from fiction.

How Does a Reverse Mortgage Work?

Reverse Mortgage Fact #1: Reverse mortgages allow borrowers to tap into their equity without having to make a monthly payment.

• At least one borrower must be 62 or older
• The home must serve as the borrower's primary residence
• The borrower must participate in a consumer information session given by a Department of Housing and Urban Development (HUD)-approved Home Equity Conversion Mortgage (HECM) counselor.

Unlike a traditional mortgage, the borrower receives money from the lender. No repayment is required until you no longer live in the mortgaged home. You're still responsible for property taxes, homeowner's insurance, and homeowner's association dues, if applicable.

Why Do Reverse Mortgages Have a Bad Reputation?

Reverse Mortgage Fact #2: Reverse Programs Have Improved to Protect Borrowers

First created in the 1960s, the reverse mortgage program has gone through multiple iterations to become the safe financial planning tool that many seniors rely on today.

Earlier versions didn't include a financial assessment, which occasionally resulted in foreclosure when the homeowner was unable to pay their property taxes or homeowners insurance. This is no longer the case; borrowers must meet minimum residual income guidelines in order to qualify.

Additionally, some lenders were more generous with their loan amount calculations, which allowed homeowners to access a larger percentage of their home's equity. Recent changes have preserved more of the home's equity so that the heirs to the property can retain ownership if desired.

The government has implemented other changes, including requiring that reverse mortgage participants meet with a HUD-approved counselor to review the loan and its costs.

"Through continued educational efforts, we hope to be able to illustrate how the reverse mortgage program has changed for the better and is now a valuable financial planning tool worthy of consideration," according to Rodd Miller, Reverse Division Manager at PacRes.

If you're considering this loan program, you should pursue guidance from your local Mortgage Advisor to make sure you understand all of the important reverse mortgage facts.

If I Take Out a Reverse Mortgage, Will I Still Own My Home?

Reverse Mortgage Fact #3: Yes, You Will Continue to Own Your House

Contrary to what you may hear, when you take out a reverse mortgage loan, the title to your home stays with you.

Your loan amount depends on your age, home value, and current interest rates. If you move out, sell, or the last surviving borrower or eligible non-borrowing spouse passes, you or your estate will need to repay the loan. However, you won't ever owe more than the value of the house.

How Do I Receive My Payments?

Reverse Mortgage Fact #4: Reverse Mortgages Have Several Different Payment Options

You may receive a large lump sum upfront, establish a line of credit that you can draw from as needed, receive equal monthly payments, or select a combination of these. The plan will impact the amount of money you receive now versus in the future, how quickly you use your home equity, and how effectively a reverse mortgage assists your financial goals.

Fixed-Rate. If you opt for a fixed rate, the only payment option is a single-disbursement lump-sum payment. You'll receive a large amount of money as soon as your reverse mortgage closes. With a fixed rate, the initial interest rate is higher than adjustable-rate plans, but the expected interest rate over time could be lower.

Adjustable-Rate. If you select an adjustable-rate option, your interest rates may change as time goes on. Options include:

• Lump-sum: Take the equity cash in one lump sum upfront. You're allowed to draw up 60 percent of your accessible funds in the first year. You're permitted to access the maximum amount of cash to pay off large expenses.
• Growing line of credit: Establish a growing line of credit that you can tap into when needed. Use it as a safety net for unexpected expenses.
• Term or tenure: Receive fixed monthly payments to supplement your income. With a term reverse mortgage, you can select the number of years you'd like to receive payments. With a tenure reverse mortgage, you can receive payments for as long as you live in the home and comply with terms.
• Modified Term Line of Credit or Modified Tenure Line of Credit: Establish a line of credit and receive fixed monthly payments for a specified amount of time or for as long as you're in the home.

Is a Reverse Mortgage Right for Me?

Reverse Mortgage Fact #5: The Right Choice Depends on You

You may be asking yourself, "is a reverse mortgage right for me?" However, without knowing all of the reverse mortgage facts, this can be a disconcerting question.

Did you know that on average, 80 percent of Americans' non-financial assets are represented by our homes? Home equity may be your largest asset, and therefore, the most viable option for financing your retirement. Reverse mortgage loans are one way to tap into this home equity.

If you're considering a reverse mortgage, there are personal factors to think about, such as your long-term financial goals. If you need a partner to help you navigate your options, contact your local Mortgage Advisor today.