The first time I heard about reverse mortgages, I had no idea what it was. I developed a picture in my mind of the Monopoly Banker running away with grandma’s deed.
Where did I develop that impression? From the negative connotation that’s out there and never fully looking into it. Also, the word “reverse” makes some people think of moving backwards or taking a step in the wrong direction. I don’t know how to correct that other than to use the technical name which is “Home Equity Conversion Mortgage” or HECM for short. Yeah, it’s a mouthful, and some will ask “What the heck is a HECM?” What I would like to do here is talk Fact VS Fiction to iron out the Old VS New. Inaccuracies can lead folks to make decisions that may have otherwise been done differently and could have very different outcomes.
Let’s talk fact and fiction. I am going to use a website called “Answer the Public” for the most searched Reverse Mortgage Questions.
1. Does the lender take your house? Fact: You always remain on title and keep ownership. You must keep up your property related charges such as property taxes, homeowner’s insurance, any HOA dues, and general upkeep. Fiction: The “bank” owns more of your home than you do and can evict you at any time for any reason. The term “bank” is incorrect as most banks don’t offer these mortgages and don’t understand them. Mortgage lenders take the time to train and educate their specialists and, in my case, we only allow people to do this type of mortgage (not conventional etc.), they can’t just originate one because they want to or know someone who is looking at one.
2. How does a reverse mortgage work? Fact: Every state may have some differing rules, but in general it allows you to convert some of the equity in your home (never all, and at most 60%) into liquid funds by a number of ways that make it one of the most flexible financial tools there are. Fiction: You will only get pennies on the dollar for the total value of your home.
3. The fees are tremendous. Fact: They are not paid out of pocket they are paid for with equity. They must be calculated out over the life expectancy of both borrowers because this is an open-ended loan. Meaning the homeowner can stay in the home as long as they like with absolute guarantee that they will never have to move or make a mortgage payment for as long as the live, as long as they meet those obligations noted in question 1. I can’t quote fees here because every situation is different, but math tells you that the longer you live in the home the smaller the fee percentage at the beginning becomes. Fiction: These fees are enormous and to quote Dave Ramsey “predatory”. FACT+1. If you were to calculate moving to a smaller home (rightsizing) and calculated the fees for selling and purchasing, they would probably be more than the fees for the HECM.
4. Once I die, the bank owns my home. Fact: Once the last living borrower exits the home permanently their heirs and or estate have time to decide what they want to do with the home. They can keep it and pay off the HECM or sell it and keep the funds above and beyond the balance of the HECM. They can also in some cases if it makes more sense sign the home over to the lender and not be held negatively liable for anything. Fiction: As soon as I pass away the lender takes ownership and anyone else living in the home is evicted.
5. I don’t need a HECM unless I am cash poor and house-wealthy. Fact: I have plenty of financial advisors, fiduciaries, and other financial professionals as well as real estate and elder legal professionals that I work with, who see this is part of a well-planned out retirement roadmap and not a life raft at all. While it can be used in an emergency most are now seeing that it’s growth potential and tax-free funds cannot be denied. Fiction: When all else fails and we are completely broke then we can use our equity, but only then does it make sense. Once the emergency red lights are flashing!
Fact+1: I would rather a client use the growth and liquidity that the HECM provides when they want rather than when they must. When it is most beneficial to them, not just to throw them a rope in the storm.
So, this is just a small sampling of the Fact VS Fiction that should be ironed out before writing off the HECM as a very flexible and viable financial tool. I will leave you with this fact. The house is the largest investment for most Americans. It represents 2/3 of our net wealth. It just happens to be an investment we live in. If you bought a stock 30 years ago at $25 per share and its now $325 per share, would you not take some of that profit? This program can unlock some of that profit and put it at your disposal while it grows, rather than staying buried in the foundation of the home.
Donald Battista, NMLS ID 2030959. If your heirs want to keep the home after your death, they will have to repay either the full loan balance or 95% of the home’s appraised value, whichever is less. Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees. Mutual of Omaha Mortgage, Inc. dba Mutual of Omaha Reverse Mortgage, NMLS ID 1025894. 3131 Camino Del Rio N 1100, San Diego, CA 92108. Arizona Mortgage Banker License 0926603. Florida Mortgage Lender Servicer License MLD1827. Louisiana Residential Mortgage Lending License 1025894. Oklahoma Mortgage Lender License ML012498. Texas Mortgage Banker Registration 1025894. These materials are not from HUD or FHA and the document was not approved by HUD, FHA or any Government Agency. Subject to credit approval. For licensing information, go to: www.nmlsconsumeraccess.org | Equal Housing Lender