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Why do so many Uninformed People Hate Reverse Mortgages? Here’s why!

angry senior citizen

Despite over a million homeowners 62 and older who are satisfied Reverse Mortgage participants, surveys show some people still have a strong distaste for them.

In nearly every case, this negative view of the Reverse Mortgage comes from misunderstanding, or lack of knowledge about the product. Here are some of the top reasons why people might fear Reverse Mortgages—and some counterpoints to consider as well.

Fear of the Unknown

If you don’t know how a Reverse Mortgage works but you have heard it has a bad rap, you may dislike it purely by instinct – things that are new or confusing are often rejected. But rather than knock something you haven’t learned about, here are some facts to help you understand Reverse Mortgages.

Most Reverse Mortgages are obtained via the federally-insured Home Equity Conversion Mortgage (HECM) program. Homeowners age 62 and older can borrow against the value they’ve built up in their homes in the form of a loan without a monthly principal and interest payment. HECMS are non-recourse.  This means you’ll never have to pay more than what your home is worth at the time of sale, even if your loan balance ends up exceeding the value of the home. This goes for you or your estate.

While there are some requirements of borrowers—including remaining current on homeowners insurance, property tax, and home maintenance—you’re free to use your loan proceeds however you see fit.

Reverse Mortgage Myths

There are a couple Reverse Mortgage “myths”—common beliefs about the loan that aren’t true.
Those myths include:

  • The bank will own your home.
  • You might lose your home or get kicked out.
  • There’s no way for adult children to inherit the home.

One of the biggest misconceptions around Reverse Mortgages is that the bank will own your home. This isn’t true at all. When a homeowner takes out a Reverse Mortgage he or she retains the title to the home, just like in a traditional mortgage.

Reverse Mortgages

Reverse Mortgages don’t become due and payable until the last surviving borrower dies or leaves the home. As long as you fulfill certain requirements related to property taxes, homeowners insurance, and upkeep, you will never be forced to leave your home. 

While Reverse Mortgages do need to be repaid (which is often accomplished by selling the home), that’s not your only option. If adult children have a sentimental attachment to the home or want to keep it in the family, heirs have the option to repay the Reverse Mortgage through other means available to them. If they decide not to keep it, the home is sold and the Reverse Mortgage is paid off. Whatever proceeds are left go to your heirs.

Adult Children Want an Inheritance

Many adult children don’t like the idea of their parents borrowing against their home equity because those children want to receive an inheritance. While it’s true the house will have a lien on the property once their parents pass away, there are a couple of factors to keep in mind.

Reverse Mortgages insured by the Federal Housing Administration are non-recourse, which means adult children will never have to pay more than the home is worth at the time of sale.

Adult children should also realize that there might be money left over after their parents take out a Reverse Mortgage. If the borrower’s heirs decide to repay the loan by selling the house, any money left over after paying off the loan goes to the heirs. In almost all cases the home is sold.

Reverse Mortgage Fees

A Reverse Mortgage has fees that are similar to any other loan insured by the Federal Housing Administration. These include an initial mortgage insurance premium of 2.0% of your home value.

These fees all go to insure your loan and make sure you always have access to any remaining funds, even if your lender goes out of business. It also provides the non-recourse guarantee, which means you will never owe more than your home is worth at the time of sale.

In addition to the fees that borrowers pay to the Federal Housing Administration, there are standard title, taxes, and lender fees that vary depending on the provider. Since you have built up this value in your home, these fees are financed into the loan so there are little to no out of pocket expenses.

Loan Balance that Grows

Some people might not like Reverse Mortgages because they are a negatively amortized loan, which means that the loan balance grows over time. This is different than a traditional mortgage because the loan balance gets smaller as borrowers make payments each month. The one thing to remember here is that all loans have interest. It goes back to the old saying, “You can either pay now or pay later.” Another nice feature of the Reverse Mortgage is the homeowners can pay on the loan if they want. Since there are no payments required, the homeowner gets to choose how much and when to pay not the lender like a traditional mortgage.

Reverse Mortgage Company lender in MD

Since borrowers pay for mortgage insurance, the threat of the loan balance growing too high is minimized because borrowers are protected if the loan balance ends up being more than the home is worth.

While every situation is different, a survey from AARP found that nearly 90% of people over age 65 want to stay in their residence for as long as possible. AARP also reported that 93% of borrowers said their Reverse Mortgages had a mostly positive effect on their lives, compared to 3% who said the effect was mostly negative.

A Reverse Mortgage might not be the right fit for each person, but it’s time people realize it’s a safe way to enable older Americans to remain in their homes and live a comfortable retirement.

I understand that this loan isn’t for everyone, but nothing is. In the 30 years I have been working with Reverse Mortgages, I have helped a very diverse group of homeowners with a variety of financial and personal situations. If you have any additional questions, you can reach me in my office at ?? 800-420-5515 or on my cell at ? 443-253-1608.   

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