The answer to this question is a simple one: NO! The reverse mortgage program is not a scam. If you are reading this, it is apparent you may have doubts about this program. Sadly, it is completely understandable. Everyone seems to have an opinion on what a reverse mortgage is, and how it works; whether it be your financial advisor, family friend, or local auto-mechanic. Unfortunately, most do not take the time to investigate this loan program for themselves before coming to these conclusions. For starters, the home equity conversion mortgage program (reverse mortgage) is a loan program that is insured by the Federal Government. The U.S. Department of Housing and Urban Development (HUD) oversees this industry. Lenders or banks that offer this product are approved by the Federal Housing Administration (FHA). These agencies set the guidelines that all lenders must abide by. The Federal Government is not going to get involved in a program that is intended to cause harm to those it serves. Secondly, this program is only available to a protected class: senior citizens. A homeowner must be at least 62 years of age to participate in this program. The whole point of a reverse mortgage is to improve the outlook many retirees have on their financial well-being. Life, as we know it, is full of uncertainty. It turns out, the number one concern Americans have in retirement is running out of money. The reverse mortgage program was enacted during Ronald Reagan’s administration in order to ease this concern. Let’s switch gears by looking at some of the most common misconceptions and see why they are false:
- The bank now owns your home – This statement is by far the largest hoax about the reverse mortgage program. The reverse mortgage program is, by definition, a home loan. Just like any other home loan, you remain the title owner to the property. The lender now has a lien against the property. This is exactly what happens when you get a traditional home loan that requires monthly repayment. The sole difference between reverse mortgages and traditional mortgages is that monthly repayment becomes optional.
- The bank can foreclose on you if your spouse dies – This objection is fielded frequently by mortgage professionals in the reverse mortgage industry. It is also false. The reverse mortgage program has provisions protecting all borrowers, and non-borrowing spouses, from this event occurring. As long as all property expenses are kept current, and the home remains your primary residence, the loan will not become due-and-payable.
- You will burden your children with debt – This is a non-recourse loan, meaning the home stands alone as collateral for this debt. Just like any other mortgage, your heirs have options:
- Sell the house, payoff the reverse mortgage debt and keep the remaining proceeds from the sale
- Refinance the mortgage debt to keep the home for themselves
- If they do not want the home, they can sign the home over to the lender via Deed in lieu of foreclosure
- Reverse mortgages are very costly – Like all home loan transactions, there are financing fees and interest rates. Like all other loans, borrowers that shop a few companies end up usually getting the most competitive offers. It is encouraged to seek the consult of a licensed loan originator and gather a few quotes.
- Only get a reverse mortgage if you are in desperate need - This program has a stigma of being solely for those who are “equity-rich and cash-poor”. It is truly not the case. Money-conscious borrowers use this tool to hedge against future financial uncertainty. Some borrowers treat it like an income-producing investment. Other borrowers use it to have the lifestyle they’ve always dreamed of in retirement. Ultimately, there is no one right answer. A licensed professional can recommend a program that best achieves your individual goals.
At the end of the day, this program is intended to improve your outlook on retirement. Although it is ideal for many, it may not be the best solution for all. The same can be said for other financial products. To see if this may be a suitable option, take this short quiz. If you’d prefer to receive a complimentary proposal on this program, we encourage you seek the consult of a licensed loan officer. Click here to request a brief consultation with a San Diego based lender.