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Although simple in concept — converting a portion of your home equity into cash while you continue to enjoy the comforts of living in your own home* — certain myths and misinformation have sprung up around reverse mortgage loans. Here we address a handful of these common mistruths:
*Borrowers could be subject to foreclosure for reasons including failure to maintain the property or to pay taxes and insurance.
No. When taking out a reverse mortgage loan, you retain title to the property as long as you meet the loan guidelines and requirements, such as maintaining the property and paying property taxes and homeowners insurance. The lender puts a lien onto the title to ensure repayment of the loan. This is the same for a reverse or a traditional mortgage.
No. You just need sufficient home equity for the loan to make sense.
No. You don’t have to earn a certain amount of money. Rather, you need to show you have the financial ability and willingness to pay your ongoing property taxes, homeowners insurance, and other property-related expenses.
No. Any leftover funds go to the heirs or the estate upon their request.
While the amount of equity typically decreases over time with a reverse mortgage, it doesn’t mean there will be no equity left when the last borrower dies. There are several factors that go into how much equity may be left, such as home appreciation, length of the loan, and optional monthly payments. There could still be equity left for your children.
A HECM reverse mortgage is a non-recourse loan, meaning that the lender can only be repaid from the proceeds of the sale of the home and not more than the value of the home. That means even if the home decreases greatly in value, the maximum repayment amount can only be up to the value of the home. Your heirs are not directly responsible for the loan repayment. However, they have the option to refinance the loan and retain the property.
No. While any existing debt on your home's title must be paid off at closing and you must have adequate equity in the property, it is not required that you own your home "free and clear" before applying for a reverse mortgage.
No. You can sell your home anytime. At the close of the sale, you would pay off your reverse mortgage at closing. There are also no prepayment penalties if you choose to pay off your loan early or make loan payments.