In my experience as a mortgage banker, it has been interesting to observe the continual misunderstandings of the Home Equity Conversion Mortgage (reverse mortgage).
In spite of the many positive articles and the many changes, consumers as well as trusted financial advisors have skepticism about this diversified product that has many positive applications. I’d like to clear up a few of the myths:
Myth: My children will be responsible for the repayment of the loan.
Fact: If the borrower, or his or her estate, wants to retain the property, the balance must be paid in full. This can be done by purchasing the home, selling the home or refinancing the home.
As long as the borrower or the estate sells the property to pay off the debt, there is no recourse if the HECM loan balance exceeds the home’s value at maturity. Any equity remaining in the property after the reverse mortgage is retired belongs to the borrower or the estate.
Myth: There are restrictions on how reverse mortgage proceeds may be used.
Fact: There are no restrictions. The cash proceeds from the reverse mortgage can be used for virtually any purpose. The following are a few of the popular uses for the proceeds:
- Pay off an existing mortgage
- Remodel or make home improvements
- Meet healthcare expenses
- Line of credit for unexpected expenses
- Supplement monthly cash flow
- Pay rising flood insurance premiums or offset their consequences
- Help out children
Myth: I cannot get a reverse mortgage if I have an existing mortgage.
Fact: If your house isn’t paid off, the proceeds you receive from the reverse mortgage must first be used to pay off any existing mortgage.
This is the most common reason most homeowners take out a reverse mortgage. Money left over after the mortgage is paid off can be used in any of the above ways.
Myth: There are no objective advisors available to seniors trying to decide if a reverse mortgage suits their needs.
Fact: Borrowers are required to counsel with independent third party counselors approved by the U.S. Department of Housing and Urban Development (HUD) in their local communities. This educational session helps them make the right decision.
You qualify for a reverse loan if you or your spouse are 62 years of age or older and the home is your primary residence.
Don Davis is a reverse mortgage specialist with Yadkin Mortgage, a Division of Yadkin Bank. don.davis@yadkinmortgage .com.