You’ve no doubt noticed a gradual increase in the number of radio and TV commercials directed at senior citizens. In between the advertisements for adult diapers and golf-oriented retirement communities in Florida, you may have heard advertisements for reverse mortgages. Although these are relatively rare mortgage products today, they are becoming more popular as more and more Americans reach their senior years; eventually, a reverse mortgage may be the right financial product to suit your, or a close family member’s, life circumstance. This is why it’s imperative to understand what a reverse mortgage is, who they’re for, and what risks may be involved.
First things first: What is a reverse mortgage? Well, it’s exactly what it sounds like. Instead of money going from your pocket into a house to pay off a mortgage and create equity, a reverse mortgage depletes the home’s equity to pull money from the home and put it in your pocket. The lender places a lien on the property that becomes due once the home is sold or the last surviving spouse passes away.
I heard a few gasps at that last sentence. “A lien?!” you say. “Isn’t it dangerous to have a lien against the property? Won’t that put possession of my home at risk?” No! There are several myths and misgivings about reverse mortgages that demand clarification. Among them:
- Whether the owner loses ownership/title. As with a traditional mortgage, the owner maintains ownership and title, while the lender merely places a lien on the property.
- Whether an owner can be forced out of their home. The laws governing FHA-backed reverse mortgages prohibit a homeowner from being evicted from their home by the lender. A homeowner cannot out-live a reverse mortgage. The owner must still pay property taxes and homeowners insurance, though.
- Whether the income from a reverse mortgage affects current benefits like Social Security or military retirement. No! The income from a reverse mortgage does not affect eligibility or entitlement amounts for government benefits. Similarly, the income from a reverse mortgage is not taxable.
- Whether your current property is eligible for a reverse mortgage. As long as you occupy the property as your primary residence, it should be eligible for a reverse mortgage. This includes duplexes, townhomes, and even mobile homes. Investment properties, however, can not be used for a reverse mortgage.
There are a lot of benefits to a reverse mortgage, but as a complicated product there are other factors to consider. The original purpose of the reverse mortgage was to provide low-income senior citizens with reliable income while keeping them in their home; it was not meant to provide free money for vacations. Reverse mortgages should not be used for frivolous purposes; as the largest asset most people will have, a home’s equity should not be treated lightly.
We have only scratched the surface of reverse mortgages so far. This is why I’ll be hosting a special educational class specifically on reverse mortgages on Tuesday, November 18th, 2014, with one of my loan offers who has years of experience originating reverse mortgage. This is a free class with an open Q&A session, and anyone interested in learning more about reverse mortgages should RSVP immediately to reverse their seat.
11-8-2014 Reverse Responsibly