Dispelling reverse mortgage myths
Cash-strapped clients may want to consider reverse mortgages, but many are scared off by some of the myths surrounding the product.
The top myth: borrowers give up ownership of their home, says Michael Kitces, director of research at Pinnacle Advisory Group in Columbia, Md., publisher of the blog Nerd’s Eye View and a Financial Planning contributor.
"It's simply a loan for which the house is collateral, similar to any other mortgage arrangement," Kitces says.
GIVE UP THE HOUSE?
Another popular myth is that one must sell their house when they die or when the reverse mortgage ends, he adds. However, borrowers or their beneficiaries can repay the loan with other assets and keep the house, particularly if it's in a greatly appreciating market.
Another myth is that reverse mortgages should be "a loan of last resort." But since lending limits are so restrictive, if someone waits until there are no other assets, they are likely not going to get enough from a reverse mortgage loan to cover living expenses, Kitces says. "A more effective way to do it is to take out a reverse mortgage several years before depleting other assets, so a person can slow down the pace of spending from their investment portfolio," he says.
Some people fear that if their home value decreases and goes below the loan balance, the bank could then foreclose on the reverse mortgage, which is not true, says Mary Jo Lafaye, a reverse mortgage consultant at Retirement Funding Solutions in Larkspur, Calif. It's a federally-guaranteed loan, so the borrower can live the rest of their lives in their home – provided they continue to use it as their primary residence, pay property taxes and maintain the home according to FHA health and safety standards.
There is also a misconception that fees on reverse mortgages are too high, Lafaye says. Origination fees on the loans used to range from $2,000 in lower home value areas, to $6,000, but most lenders now offer zero origination fees. Some lenders even pay closing costs. "Investors are anxiously buying these government-insured loans for their portfolios, enabling lenders to charge lower rates," she says.
There's also the myth that servicing fees are still high, but a number of lenders are now offering no servicing fees, says Amanda Keith, another Retirement Funding Solutions consultant.
The closing costs of a reverse mortgage are comparable to those of a forward mortgage, says Chris Mayer, chief executive officer at Longbridge Financial in Mahwah, N.J. But the costs can appear to be pricier on a reverse mortgage if a borrower only takes out a low amount at the outset. If the borrower takes into account that the guaranteed line of credit rises over time, then the closing costs "can be viewed as much more reasonable."
Katie Kuehner-Hebert is a freelance writer in Running Springs, Calif. She has contributed to American Banker, Risk & Insurance and Human Resource Executive.
This story is part of a 30-day series on Social Security and retirement income strategies.