I often hear people describe a reverse mortgage as a scam, especially online. Somebody will ask a legitimate question about a reverse mortgage and someone will respond in the comments with, “Don't do it! It's a scam.” Somebody else will chime in and say, “My neighbor's Uncle Henry got one and lost his house!” It's all a bunch of common misconceptions and unfortunately there's still a negative connotation that shrouds reverse mortgages. It is mainly due to a lack of knowledge in how the product really works. The truth is a reverse mortgage is a well regulated financial instrument that may be beneficial for the right borrower.
What is a reverse mortgage?
A reverse mortgage allows you to convert home equity into cash, much like a home equity line of credit. But unlike a traditional mortgage where you're required to make monthly mortgage payments, on a reverse mortgage you're not required to make monthly principal and interest payments. You are still required to pay taxes, insurance, and upkeep the home but it is not required to make monthly payments although it is allowed if the borrower chooses to do so.
Similar to a traditional mortgage, interest is charged on a reverse mortgage and will accrue causing the loan balance to increase over time. At the end of the loan, you are required to pay back the entire sum, but you will not owe more than the home is worth no matter what happens to home values.
A reverse mortgage is a non-recourse loan
What does that mean for you? That means that you or your heirs will never owe more than what the home is worth. This is what I like to point out to everybody that says a reverse mortgage is a scam.
What does “non-recourse” mean?
Non-recourse debt is a type of loan secured by collateral, commonly property. If the borrower defaults, the issuer can seize the collateral but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount. A non-recourse debt does not hold the borrower personally liable for the loan.
This is not to say that it is impossible to get your home foreclosed upon (ie: lose your house), because as with any mortgage loan, it is possible. The requirements to stay in the home with a reverse mortgage are simple:
Occupy the property as your primary residence (and not live outside the home for more than 12 consecutive months)
Continue to pay your taxes, fees (including HOA fees) and homeowners insurance
Maintain or upkeep the home.
A common misconception is that you will lose your home once you “use all the available money” or home prices decline and you owe more than the property value. This is not true. You can live in the home as long as you desire as long as you are not in default per the requirements listed above. There is no deadline or cutoff based on age, home value or reverse mortgage balance.
Reverse mortgages are well regulated
The largest misconception about reverse mortgages is that they are dangerous to consumers. The truth is that many reverse mortgages are regulated by the Department of Housing and Urban Development (HUD). The US Government has been proactively adding industry safeguards and developments to make today’s loans safer than ever (starting with the SAFE Act in 2008). A reverse mortgage, though not for everyone, is something that older Americans need to consider.
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