Reverse mortgages have become increasingly popular since the recent economic recession. They are an excellent option for seniors who need additional income to meet their needs. But along with their growing popularity have come many misconceptions and myths. Here are some of the common myths and facts about how they really work.
Myth: The bank owns your home.
Truth: You own your home in the exact same way that you do under a traditional mortgage. You will still hold the title and they have a mortgage note against it.
Myth: You must own your home free-and-clear to qualify for a reverse mortgage.
Truth: While you do have to have equity to cover the money being withdrawn for the loan, you do not have to own your home outright. When getting a reverse mortgage, any current loan you have will be paid off and replaced with your new loan.
Myth: When the loan comes due, the bank will sell the home.
Truth: There are several options for repayment of a reverse mortgage. The costs can either be covered when you or your heir sell the home or the loan amount can be covered by refinancing into a traditional mortgage. Either way, the bank will not repossess the home and sell it themselves.
Myth: Moving to a smaller house is cheaper.
Truth: There can be many benefits of moving into a smaller home, and the cost is among one of them, but it is not necessarily cheaper. Moving into a smaller home can still require a monthly payment while you will be getting money back with a reverse mortgage.
Myth: Reverse mortgages are only for the last resort.
Truth: Making any serious financial decision under duress is not recommended. Ideally, the decision to get a reverse mortgage will be part of careful financial planning. It is an excellent way to get cash out of the equity you own while eliminating monthly mortgage payments, freeing up, even more, money to meet your expenses.
Myth: Only elderly widows use reverse mortgages.
Truth: When HUD initially started offering reverse mortgages, the majority of those applying for the loans were elderly widows. But as awareness for the program has spread, a variety of people in differing situations have taken advantage of these loans.
Myth: Reverse mortgage income is taxable and will affect your Social Security and Medicare benefits.
Truth: According to current IRS rules, reverse mortgage income is not taxable because it is deemed to be a loan. This income also is not counted against any potential Social Security or Medicare benefits. If you’re worried about tax issues, it is good to talk to a tax expert. Income from this program can affect Medicaid and Supplemental Security Income (SSI) as it is considered to be an asset. For purposes of dealing with those programs, it is recommended you only withdraw enough to cover your monthly expenses, so they won’t count against you.
Myth: Lenders take advantage of seniors.
Truth: A reverse mortgage is simply one other loan option that’s available through a lender. They make their money through interest on the loan just as they would with a conventional mortgage. The difference is how this program affects your monthly expenses and income.
A reverse mortgage can be an excellent option for those with low or declining incomes. This program enables you to maintain your current lifestyle while eliminating the stress of a monthly mortgage payment. As with any major financial decision, we recommend you consult with knowledgeable advisors and do your research. But we hope we’ve cleared up some misconceptions about reverse mortgages and made it clear why they can be a useful financial tool.
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