The money experts on TV and radio have never fully understood Home Equity Conversion Mortgages (HECMs) and the proper use of these reverse mortgages. From Dave Ramsey to Suze Orman, they have not taken the time to listen to researchers within their own financial planning community who regularly publish papers on the advantages of this financial tool. While Clark Howard has recently reconsidered his position on them, he and others still don’t tout the financial planning advantages this program offers to older homeowners.
Meanwhile, the homeowners themselves have been very happy with their reverse mortgages. The client satisfaction ratings are much higher than with the alternatives. Maybe we have not explained the basics properly to the financial media. So, let’s clarify a few items that are commonly misunderstood:
- You keep title and ownership of your home
That’s true. The bank does not take your home now or when you die. However, this is still the most common misconception. This may have been true for some reverse mortgages prior to 1989, but the government-insured reverse mortgage has never allowed the lender to hold title. Homeowners retain ownership of their homes throughout the life of the loan, and can choose to sell the home at any time without prepayment penalty.
However, it is possible for ANYONE who owns a home to lose it. If you stop paying your property taxes, you risk losing your home. That is true whether you have a reverse mortgage, forward mortgage, or no mortgage at all. The reverse mortgage should actually REDUCE the fear that this will happen, as periodic draws from home equity should INCREASE a homeowner’s ability to pay property charges.
- You will not owe more than the value of your home
One of the first items addressed in nearly every basic training on reverse mortgages is that the FHA insures against this happening. The FHA guarantees that homeowners and their heirs will NEVER be responsible for reverse mortgage debt that exceeds the value of their homes. This is called the “non-recourse” clause, and is a primary consumer protection for homeowners and their heirs.
- Reverse mortgages are not expensive when used properly
There are fees just like any financial transaction, and reverse mortgage fees are not only federally regulated, they are also common to mortgage transactions in general. In fact, there may be cases where the lender will pay some of those costs. If using the reverse mortgage for short-term cash, it may indeed be expensive. But that is not the intended purpose. When used over a longer term, to continue occupying the home, the upfront fees are minor when compared to the long-term benefits of a line of credit that grows tax free that may be converted later into tax-free cash.
- Reverse mortgages are more than a way to access cash
There is still a perception that this is a “LAST RESORT” loan. This is not the case at all. We can show that using a reverse mortgage as part of your retirement plan can extend your assets beyond what traditional retirement plans offer. Although some seniors may have a greater need than others, many simply prefer to be free of monthly mortgage payments. Without a monthly mortgage payment, many homeowners find they can retire, maintain their existing quality of life, and enjoy their retiring years.
The reverse mortgage is also being used to purchase a home. Whether you need to relocate to be closer to family, downsize to a more manageable home, or upsize to a retirement dream home, the reverse mortgage can help keep more money in your pocket.
If you want to know more than the money experts do about the strategic uses for reverse mortgages, please subscribe to this blog and purchase my book, Understanding Reverse.