Clients often harbor deeply ingrained but misinformed impressions of how reverse mortgages work. Before engaging a client with a discussion about how his housing wealth may protect the investment portfolio, a planner may first wish to uncover typical, but incorrect, impressions:
“The bank gets the house.”
Title to the home remains with the homeowner or his estate.
“I will be leaving a debt my children will have to repay.”
The home itself is sole collateral for the loan. No deficiency judgment may be taken against the borrower or his estate. All remaining equity belongs to the borrower or his estate. The lender is not entitled to an equity share.
“Once I have used all the money, I will have to move.”
There is no fixed maturity date or future credit limit for the HECM Saver. As long as one borrower remains in the home as a principal residence, maintains the home, and meets tax and insurance obligations, the mortgage remains in effect. The mortgage is in force until the last borrower dies, moves, or sells.
“There is a catch. I will have to pay it back somehow and I will lose my house.”
No payments on either the principal or interest ever are expected. The lender cannot foreclose for failure to make payments on the loan. Independent and mandatory FHA – approved counseling verifies that borrowers review the terms of the loan before applying with a lender.
“My house must be owned free and clear to do a reverse mortgage.”
There certainly can be a current mortgage or mortgages on the home. Depending on borrower age, the appraised value, the total debt on the home and the interest rate environment, reverse mortgage proceeds can eliminate the current liens and eliminate those payments.
“Bad press means that where there is smoke, there is fire.”
Academicians increasingly are taking the mainstream media to task for publishing sensational but incomplete “stories” about reverse mortgage outcomes. Most unfortunate outcomes that are cited in negative press are the result of borrower mismanagement. The new rules effective October 1, 2013 will go a long way to correct that. Particularly egregious liberty with the facts has been at the hands of “expert” financial writers claiming that reverse mortgages are best used as last resort. Tested by math, Drs. Barry and Stephen Sacks prove that this conventional advice would trigger the worst outcome for retirees.