By Alain Valles
Reverse mortgages are becoming a crucial component of financial planning for senior homeowners. These government-insured loans, also known as Home Equity Conversion Mortgages (HECMs), convert illiquid home equity into tax-free cash.
Though reverse mortgages were introduced in 1987, many people still carry old and misguided ideas about what a reverse mortgage is and how it works. Here are five common misconceptions about reverse mortgages.
•“I will lose my home.” With a reverse mortgage you retain full control and ownership of your home. As long as you continue to pay your real estate taxes, homeowner’s insurance and maintain your property, you may remain in your home for the rest of your life. You may sell your home at any time with no prepayment penalty.
•“I won’t qualify because I have very little income, challenged credit or poor health.” A reverse mortgage currently has no income, credit score or health requirements. Even a bankruptcy or pending foreclosure is allowed. The only requirement is any delinquent federal debt must be satisfied.
•“I can’t afford to make monthly payments on a reverse mortgage.” The unique feature of a reverse mortgage is there is no requirement to ever make a monthly mortgage payment. This is considered the magic feature of a reverse mortgage because you may receive a lump sum amount of cash, a monthly check for life or a line of credit to be used if ever needed with no monthly payment for as long as you live in the home.
•“I won’t qualify because I have a mortgage on my home.” There is no requirement for your home to be free and clear. Many seniors currently have a mortgage. A large percentage of those people are struggling to make the required monthly payment, which is influencing their quality of life. The tremendous advantage of replacing that debt with a reverse mortgage is the significant increase in monthly cash flow that hopefully will reduce any financial stress.
•“Only someone who is ‘cash poor’ needs a reverse mortgage.” Nothing could be farther from the truth. Even if you have no pressing need for cash or monthly tax-free income, a reverse mortgage is a credible estate planning tool to protect against unexpected life events such as a health challenge or a family emergency cash request. Having a reverse mortgage line of credit in place can give peace of mind that one is prepared for the unknown.
A reverse mortgage is not for everyone. But for many qualified homeowners, it is an excellent way to access the equity that has built up in your home without taking on additional monthly debt payments. There are strict federal and state guidelines and protections built into reverse programs.
Alain Valles, CRMP and president of Direct Finance Corp., was the first designated Certified Reverse Mortgage Professional in New England. He can be reached at 781-878-5626 x224, by email at [email protected] or visit lifestyleimprovementloan.com. Articles from previous issues can be read at fiftyplusadvocate.com.