Are you unsure if reverse mortgages are legit or scams?
Are you unsure if they are right for your or a senior homeowner you know?
Reverse mortgages, also known as Home Equity Conversion Loans (HECM), have grown in popularity over the years. Many misperceptions have resulted.
While reverse mortgages are a great financial tool for seniors, they may not be for everyone. It is important to understand the facts and myths about reverse mortgages before you consider applying for one.
Myth #1: A reverse mortgage is the same as any other type of home loan.
Reverse mortgages are a loan that allows homeowners over the age of 62 to convert some of their equity into cash.
Unlike traditional home equity loans and second mortgages, the loan is not repaid until you move out of the property or default on your mortgage payments.
Myth #2: Reverse mortgage applicants use the loan proceeds to go on vacations or for other fun activities.
The truth is most applicants use loans today to pay off existing mortgages or other debts.
These loans are considered by 33% of homeowners who want to increase their monthly income to allow them to stay in their homes longer.
Myth #3: Reverse mortgages can be very costly.
The cost of a home loan can be high due to closing fees, third-party fees (such as title search, appraisal, and registration costs), as well as service fees. These costs can be paid as part of a reverse mortgage loan.
Applicants who select a traditional HECM Standard reverse loan must also pay an upfront FHA insurance premium, which can amount to as high as 2% of their home’s value. However, insuring will guarantee that you will receive the loan payments as planned.
Myth #4: Reverse mortgages should be used only as a last resort.
It is not a good idea to make financial decisions when you are stressed. You have fewer options if you wait for a small problem to become a major problem.
You won’t get much help if you wait until you are in financial trouble. Reverse mortgages should be used to supplement a sound financial plan and not as a tool for crisis management.
Many public and private benefits are available to supplement or replace a reverse mortgage if you have a low income.
Myth #5: Most people who obtain a reverse mortgage are widows over 60.
When HECMs first became available by the Department of Housing and Urban Development, many applicants were older women looking for a supplement to their modest income. This has all changed.
Many older couples used a reverse mortgage during the boom to save money and have extra money to live comfortably. These loans are being used by younger applicants, often boomers, to pay down debt or manage their mortgage.
Reverse mortgages have a unique feature: the applicant’s age determines when they can apply. The problem is that some applicants lose their collateral while their loan balance increases.
Myth #6: A fixed-rate reverse mortgage can be a great idea.
You’re likely to have a 30-year fixed-interest residential loan if you’re like most homeowners. This allows you to calculate how much each month you should budget for your mortgage payments.
This conventional wisdom does not apply to reverse mortgages. These do not require monthly payments.
Fixed-rate HECM reverse mortgages have many drawbacks. These loans require that applicants withdraw all their funds at closing. This means they will have to pay interest on a large amount of money. This could quickly drain your real estate guarantee.
Myth #7: Reverse mortgage counseling can be a timewaster
It is difficult to decide whether you want to apply for a reverse mortgage loan. It can be difficult to predict how much you will spend on your home and what you will need for long-term living.
An experienced counselor will help you to understand the features and costs of various types of reverse mortgages and determine the best option for you. You can also talk with them about other benefits, such as public and private ones that will help you remain independent for longer.
Myth #8: Most reverse mortgage applicants that end up in foreclosure are swindled.
Reverse mortgage applicants can stop foreclosure if they don’t pay property taxes, insurance, or maintain their home in good condition.
This is especially true for seniors who borrow the whole loan in one lump sum and then spend it quickly, perhaps to protect against a bad situation.
People who have difficulty paying their bills can be overwhelmed by large medical expenses or health issues, which makes it more difficult for them to meet their obligations.
Scammers can target older homeowners by offering investment and real estate deals that seem too good to be true. There are cases when family members of older homeowners convince them to take out a reverse mortgage.