Dispelling The Myths About Reverse Mortgages

The misconceptions regarding the terms of reverse mortgages astound me to no end. Despite the recommendations received from the American Association of Retired Persons (AARP), the idea of applying for a reverse mortgage continues to elicit worry among seniors. It’s even exacerbated by friends who declare reverse mortgages to be bad news despite lacking credible information about the matter.

In this article, we're going to dissuade the myths about reverse mortgages that continue to permeate through the collective consciousness of our seniors.

1. The most common misconception about a reverse mortgage is that it often leads to the homes being taken away from the borrowers. This is not true. In fact, the borrower will have perpetual ownership of the home that is under the reverse mortgage program. This ownership is made more secure by the lien that is placed on the property, just like any other mortgage. It guarantees that the lender will always be repaid for the amount owed, removing the threat of having the home removed from the borrower.

Since most reverse mortgages are Federal Housing Administration Home Equity Conversion Mortgage (HECM) types, full protection by the US government is assured through the use of the mandatory 2% insurance fee that is payable on all FHA reverse mortgages.

The remaining types of reverse mortgages are called the Proprietary Reverse Mortgages and Federal National Mortgage Association. These are also safe as guaranteed by private lenders.

2. The next big misconception is the notion that a reverse mortgage is more expensive than other types of mortgages. On the contrary, a reverse mortgage's closing costs are pricier than an FHA mortgage's by only 1% if obtained on the same property. Conventional mortgages, on the other hand, charge more than 2%.

The interest rate also plays a big factor here. While conventional mortgages use the prime rate as their base, the FHA reverse mortgage interest rate depends on the one year United States Treasury Note. This clearly shows that the interest rate generated through the Reverse Mortgage is much lower compared to that of a conventional mortgage.

3. There's a common misinformed notion that the home will be given to the lender once the borrower has died or has moved to another permanent location. This is an outright lie. It actually follows the same procedure as a normal mortgage where the equity actually goes to either the estate or the heirs of the borrower.

As a non-recourse agreement, a reverse mortgage requires the estate to pay the lender the value of the home at the time of the repayment. The same thing applies in the case of a decrease in the value of the home or if the borrower reaches extreme old age.

4. The last misconception is that a tax is impossible on a reverse mortgage and that Social Security and health insurance are affected by the terms. In the first place, a reverse mortgage is not an income, but a loan. That alone is the clincher in this argument.

If you are still in doubt about the security that you get through mortgages, you can refer to specific publications from AARP. It's a legitimate body involved with reverse mortgages that can provide you reliable information.