FAQ & Common Myths

The concern about the impact that a reverse mortgage may have on the kids is a common question we hear.  However, with the recent changes to the reverse mortgage program, there are actually many benefits to the heirs versus a conventional mortgage.  

Here are some things to consider:

First: The money to pay for living expenses has to come from somewhere.  Whether you are withdrawing money from a checking account, retirement account or your home’s equity, your overall net worth will remain about the same in the end, so the children can expect a similar inheritance in any scenario…even by leveraging your home’s equity with a reverse mortgage.  However, one big difference is, once a checking account or retirement account is depleted, there is no chance for it to recover, unlike a home’s equity, making it a potentially safer financial strategy.

Second: The heirs will inherit any remaining equity in the home, not the bank.  In fact, if the home appreciates at a modest 4% rate each year, the current equity will be preserved in almost all scenarios.

Third: In the unlikely event that the reverse mortgage loan balance exceeds the home value upon the last spouse leaving the home, the reverse mortgage loan is unique in that the heirs will not have to repay any negative equity.  That is huge advantage to the estate since they are obligated to repay negative equity on a conventional mortgage.

Lastly: There are potentially significant tax advantages to the heirs on a reverse mortgage that a conventional mortgage doesn’t allow.  For example, the heirs may get to deduct the accrued interest on the reverse mortgage when they sell the home, potentially giving them a tax-free earnings year (please consult with a CPA).

As you can see, a reverse mortgage offers a number of benefits and protections for the heirs.  Please contact us if you would like to discuss this in more detail.

Most people have a mortgage on their home.  As long as the minimum qualifications are met required to obtain a reverse mortgage, the existing mortgage will be paid off with the new reverse mortgage – completely eliminating a mortgage payment for life.  However, the borrower is still responsible for paying property taxes and homeowners insurance.

A reverse mortgage does not become due and payable until the last borrower or non-borrowing spouse moves or sells the home, passes away, or does not comply with the obligations of the loan.

Up until a couple of years ago – the lender was able to educate and position a reverse mortgage to seniors and their adult children with no accountability.  This unfortunately led to some predatory practices whereby the lender offered a product that earned him/her a large commission and was not a good fit for the senior.  In order to combat predatory practices, HUD has since required that an independent 3rd party counseling service sit down with the senior (and adult children if applicable) to review the loan product and make sure it is a good fit for them.

One of the most important changes to the product was a significant decrease in closing costs and lower interest rates. These two factors now allow thousands of seniors to preserve more equity in their home during the lifetime of the loan.

Another important guideline change addressed the issue of the ‘large, lump sum’.  In the past, the senior was able to take out a significant amount of cash from their home all at once, which led to overspending, gifting, vacations and other expenditures, which quickly depleted the funds and quickly put them in financial trouble.  The current laws strictly limit how much cash the senior can take in the first year of the reverse mortgage, thus lowering the chances of ‘over-spending’.

The last important law change that recently went into effect in August of 2014 has to do with non-borrowing spouses.  At the time the reverse mortgage is taken out, sometimes only one spouse is on the loan typically because they do not meet the minimum age requirement of 62.  Previously, if the borrower on the loan were to pass or move out of the home, the surviving spouse would be forced to pay back the entire reverse mortgage in full – which meant many times being forced sell the home and leave.  With the current rules, the surviving, eligible, non-borrowing spouse, may remain in the home and is not responsible for repayment until they no longer occupy the home as their primary residence or fail to meet the obligations of the loan.

With a second mortgage, or a home equity line of credit, borrowers must make monthly payments on the principal and interest.  A reverse mortgage is different, because it pays you – there are no monthly principal and interest payments.  With a reverse mortgage, you are required to pay real estate taxes, utilities, and hazard and flood insurance premiums.