As it turns out, Ben Franklin didn’t really discover electricity. While many still believe he did, it’s simply not true. Just like this common fallacy, the complex reverse mortgage program is highly misunderstood. This was the primary reason I wrote the book, Understanding Reverse. It’s also why many reverse mortgage providers feature top reverse mortgage myths on their websites.
If I were to walk downtown and ask strangers why they wouldn’t consider a reverse mortgage at age 62, the most common response would be that “the bank would get their home.” So let’s address that misconception first.
MYTH: The bank gets your home after you die
TRUTH: The Federally-Insured reverse mortgage program has been around for 27 years, and homeowners never relinquish title or ownership of their homes at closing or after they die. The homeowner holds title throughout the life of the loan, and can sell it at any time with no pre-payment penalty.
So, why does this continue to be a top misconception? Historically, homeowners have used reverse mortgages to draw large amounts of home equity upfront. If there is no equity left after the last homeowner’s death, the heirs have no financial incentive in selling it. They will often sign the deed over to the lender at that time.
Is the product too complex? Do poor explanations of the product leave homeowners to make simplistic assumptions on their own? Has the improper use of reverse mortgages in the past tainted the perception of the program? These are all possible reasons for continued misperceptions.
It didn’t help when the popular sitcom, Modern Family, aired an episode where one older homeowner explains to another that with the reverse mortgage “essentially, the bank buys your home.” No! That is only reinforcing the most common misconception.
All we can do at this point is continue to promote an accurate understanding. So, the following is a list of other common myths that seem to persist:
MYTH: You can owe more than the value of the home
TRUTH: Many people ASSUME the estate will be “underwater” when they sell it, or when they die. Fortunately, reverse mortgages include a “non-recourse feature” ensuring that the homeowner will never owe more than the value of the home at the time it is sold.
MYTH: The heirs get stuck with a bill
TRUTH: In fact, the heirs are protected by the non-recourse feature, just like the homeowner. Of course they can sell the home or refinance in their own name. But, the home is ultimately responsible to pay back the loan balance, and any residual equity would be theirs as an inheritance.
MYTH: You might outlive a reverse mortgage
TRUTH: Even though the note lists the maturity date as the youngest borrower’s 150th birthday, if someone were to actually live that long I believe FHA would still service the loan at that point. I don’t think we need to lose any sleep over that one.
MYTH: Reverse mortgages are expensive
TRUTH: They can be expensive if used as a short-term cash-out refinance. When used properly, however, for a homeowner who wants to stay in their home, they can be very inexpensive.
MYTH: They are just for the desperate and needy
TRUTH: Sure, reverse mortgages can often help those who are house rich and cash poor. However, there are multiple financial planning options for the affluent.
MYTH: They increase your risk for foreclosure
TRUTH: Reverse mortgages do not require monthly principal and interest payments. Therefore, the primary risk for default is failure to pay property taxes. The reverse mortgage, if used properly, should reduce the likelihood of that occurring.
I was surprised to also learn that Thomas Edison didn’t invent the lightbulb – another popular misconception. While Franklin and Edison contributed significantly to the world of science, maybe the truth behind their accomplishments was just too complex for us to learn in elementary school. And as a result, that caused us to have a poor understanding of the facts.
If you want to know the facts about reverse mortgages, please subscribe to this blog and purchase the book, Understanding Reverse.
Dan Hultquist