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Retirement Planning > Social Security

Reverse mortgage myths

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  1. The bank takes the house or the borrower can lose the house. With a reverse mortgage, the borrower retains title to the home throughout the life of the reverse mortgage. The borrower cannot, as a result of the reverse mortgage, be forced out of his or her home as long as property charges, such as taxes and insurance, are paid and the home is maintained in reasonable living condition. Once the last borrower permanently moves out of the home, the loan must be repaid.

  2. The home must be paid off or be debt-free to qualify for a reverse mortgage. Reverse mortgages convert home equity into cash. As long as there is sufficient equity in the property, the homeowner may be eligible for a reverse mortgage. In fact, many seniors use a reverse mortgage to pay off an existing mortgage in order to eliminate a required monthly mortgage payment.
  3. When a reverse mortgage becomes due, the bank sells the home. The borrower is in control of the home and retains title, not the bank or lender. So while it’s common for the borrower or the heirs to sell the home to repay the loan, it’s a decision the borrower or his heirs make. The borrower or the heirs might also refinance the home in order to repay the loan.
  4. It’s cheaper to move to a smaller house. While this strategy might be right for different reasons, seniors need to analyze their costs carefully before making this assumption.
  5. Children want the home or don’t feel comfortable with a reverse mortgage. Seniors are encouraged to talk with their children about reverse mortgages. Many baby boomers are faced with trying to plan for their retirement and pay for their children’s education. Often, the children of many seniors are happy that their parents have a financial solution available to help them live more independently and financially secure.
  6. The borrower could end up owing more than the home is worth. Two of the great safeguards for reverse mortgages are that they are structured so that the borrower or his estate can never owe more than the value of the home upon repayment. In addition, the HECM products are insured by the Federal Housing Administration, an arm of the U.S. Department of Housing and Urban Development (HUD).
  7. Reverse mortgage proceeds will impact Social Security and Medicare benefits. A reverse mortgage will generally not affect regular Social Security payments or Medicare benefits. Depending upon the borrower’s situation, a reverse mortgage may affect benefits one receives from the Federal Supplemental Security Income program, or state-administered programs like Medicaid.
  8. There are restrictions on how the money is used. Cash proceeds from the reverse mortgage can be used for any purpose. Many seniors have used reverse mortgages to travel, pay off debts, help their kids, make a luxury purchase or just live more comfortably.
  9. Once the proceeds are received, taxes will need to be paid. The cash proceeds from a reverse mortgage are tax free.
  10. Reverse mortgages are only for seniors in need, or for the ?house rich, cash poor.’ The reverse mortgage is an excellent financial planning tool that has been used by homeowners from all walks of life to enhance their retirement years. Increasingly, lenders are seeing interest and growth among jumbo reverse mortgages geared toward borrowers whose homes exceed the FHA lending limits, which peak below $400,000. Many seniors with multi-million dollar homes are using reverse mortgages as part of their estate or legacy planning in conjunction with advice from financial advisors.