From seizing your house to evicting your spouse, reverse mortgages often get a bad rap. That’s mostly because they’re misunderstood.
If handled correctly, reverse mortgages can be lucrative for homeowners age 62 or older looking to convert the value in their home into monthly retirement income. Problem is, there are lots of myths out there about what reverse mortgages do and how they work. We’ve debunked five of them.
But first, what is it?
A reverse mortgage lets you turn the equity in your home into tax-free money. It pays off your existing mortgage with a new loan you don’t have to repay for as long as you live in your home. It also eliminates monthly mortgage payments and lets borrowers choose whether they’ll get paid in a lump sum, monthly payouts, a line of credit or a combination of all three.
Now, about those myths…
Myth 1: Your house is no longer yours
Wrong. Even with a reverse mortgage, your house still belongs to you. The lender doesn’t foreclose on your home as long as you keep paying property taxes, insurance premiums and other costs associated with homeownership. However, if you fall behind on those obligations, you put your home at risk for foreclosure.
Myth 2: Your kids get the shaft
Not necessarily. If you get a reverse mortgage but die before the loan is fully repaid, your children or other heirs become responsible for paying off the mortgage. But they have options. They can either sell the home to settle the debt, or they can repay the full loan balance or pay 95% of the home’s appraised value — whichever costs less.
Myth 3: Your spouse ends up homeless if you die
Your spouse can continue living in the home if they’re a co-borrower on the mortgage contract. Even if they’re not a co-borrower, they can stay in the home as long as they:
- Were married to you, the borrower, when the loan closed
- Were married as a non-borrowing spouse in the mortgage documents
- Use the home as their primary residence
- Can prove they have the legal right to remain in the property
- Can continue paying property taxes, homeowner’s insurance and other homeownership fees
Myth 4: To qualify, your home has to be paid off completely
As long as you have a significant amount of equity in your home, you can qualify for a reverse mortgage. The general rule of thumb is having at least 50% equity in your home, meaning it’s half paid-off. Once you get your reverse mortgage loan, the outstanding balance on your first mortgage gets paid off.
Myth 5: They’re not safe
For years, predatory lenders and scammers used reverse mortgages to take advantage of the elderly. Then, the federal government got involved and passed regulations that make reverse mortgages much safer.
Most reverse mortgages today are home equity conversion mortgages, or HECMs, insured by the Federal Housing Administration. The FHA limits the amount of money you can borrow during the first year of your loan, so you can ensure your payouts last longer. Origination fees help you avoid paying exorbitant charges levied by some private lenders. And you get mortgage counseling to help you understand your new loan and feel confident about your decision.
If you’re looking for a way to supplement your income, consider a reverse mortgage. Go to LendingTree’s marketplace to connect with lenders offering competitive rates. Select the loan that works best for you.