Reverse mortgages have existed for decades, yet many people still don’t fully understand them.
There are a lot of misconceptions and taboos surrounding these financial products, particularly when it comes to older adults.
In an effort to break through the confusion, Starts at 60 have explored some of the common misunderstandings about reverse mortgages.
A reverse mortgage is a type of loan that allows homeowners who are at least 60 years old to convert some of their home equity into cash. Unlike traditional mortgages, with a reverse mortgage, the borrower doesn’t make monthly payments to the lender. Instead, the lender makes payments to the borrower, either as a lump sum, a line of credit, or monthly payments.
The loan becomes due when the borrower sells the home, moves out of the home, or passes away. At that point, the loan must be repaid, usually through the sale of the home.
Reverse mortgages are called “reverse” because they work in the opposite way of a traditional mortgage. With a traditional mortgage, the borrower takes out a loan to buy a home and makes payments to the lender over time to pay off the loan. With a reverse mortgage, the borrower already owns the home and takes out a loan against the equity in the home. The loan doesn’t have to be repaid until the borrower no longer lives in the home.
To qualify for a reverse mortgage, the borrower must be at least 60 years old and own their home outright or have a low mortgage balance that can be paid off with the loan proceeds. The amount of the loan depends on several factors, including the borrower’s age, the value of the home, and the interest rates at the time the loan is taken out.
Once the loan is approved, the borrower can choose how to receive the funds. They can take a lump sum payment, a line of credit that they can draw on as needed, or monthly payments for a set period or for as long as they live in the home.
Despite the potential benefits of a reverse mortgage, there are many misconceptions about these loans that can make people hesitant to consider them.
With over 14 years of experience in the finance industry, Chief Financial Officer of Energy Casino, Arvin Joanino is well equipped to discuss some of the common misconceptions that arise when the topic of reverse mortgages comes up.
“One of the most significant taboos surrounding reverse mortgages is the misconception that it is a scam or a way for lenders to take advantage of vulnerable seniors,” Joanino explains.
“In reality, reverse mortgages can be a valuable tool for retirees who need additional income to support their retirement lifestyle.
“For example, one of my clients had a sizable amount of equity in their home but was struggling to make ends meet on their fixed retirement income. We discussed the option of a reverse mortgage, and they were able to receive monthly payments from the lender, allowing them to stay in their home and maintain their standard of living.”
However, misconceptions and taboos around reverse mortgages still abound. Here are some of the most common misunderstandings about reverse mortgages:
Many people assume that only people who are struggling financially would consider a reverse mortgage. While it’s true that a reverse mortgage can be a helpful financial tool for people who need extra income in retirement, it’s not only for people who are broke. In fact, many financially secure retirees use reverse mortgages to supplement their retirement income, pay for healthcare expenses, or make home improvements.
Another common misconception is that the lender will own the home after the borrower passes away or moves out. In reality, the borrower or their heirs still own the home and can choose to sell it or keep it in the family.
Like traditional mortgages, reverse mortgages come with fees, including origination fees, closing costs, and mortgage insurance premiums. However, these costs are usually financed into the loan, which means the borrower doesn’t have to pay them out of pocket. In some cases, the fees can be higher than traditional mortgages, but they’re also more complex to set up.
One of the biggest concerns about reverse mortgages is that the loan will become due if the borrower outlives the loan. This can happen if the borrower lives for a very long time or if they take out a larger loan than their home is worth. However, even if the loan becomes due, the borrower or their heirs can still sell the home to repay the loan and keep any remaining equity. In fact, the borrower or their heirs have up to 12 months after the borrower’s death to repay the loan and keep the home.
Joanino says that “overall, it is essential to weigh the pros and cons of reverse mortgages carefully and to work with a financial advisor who can help you understand the implications for your specific financial situation.”
“While reverse mortgages can be a useful tool for some retirees, they are not suitable for everyone, and it is important to consider all options before making a decision,” Joanino explains.
Reverse mortgages can be a valuable tool for older adults who want to access the equity in their homes to supplement their retirement income, pay for healthcare expenses, or make home improvements.
However, there are still many misconceptions and taboos surrounding these loans that can make people hesitant to consider them.
By educating people about how reverse mortgages work, addressing their concerns and fears, and breaking down the stigma surrounding these loans, we can help more people make informed decisions about their finances and improve their quality of life in retirement.