Myth #4: Reverse mortgages should only be used as a last resort.
Truth: It’s never a good idea to make a financial decision under stress. Waiting until a small issue becomes a big problem reduces your options. If you wait until you are in a financial crisis, a little extra income each month probably won’t help. Reverse mortgages are best used as part of a sound financial plan, not as a crisis management tool. If you live on a limited income, there are many public and private benefits that can be an alternative or supplement to a reverse mortgage. You may qualify for help with expenses such as property taxes, home energy, meals and medications.
Myth #5: Most people who take out a reverse mortgage are elderly widows.
Truth: When HECMs were first offered by the Department of Housing and Urban Development (HUD), a large proportion of borrowers were older women looking to supplement their modest incomes, but that has changed. During the housing boom, many older couples took out reverse mortgages to have a fund for emergencies and extra cash to enjoy life. In today’s economic recession, younger borrowers (often boomers) are turning to these loans to manage their existing mortgage or to help pay down debt. Reverse mortgages are unique because the age of the youngest borrower determines how much you can borrow. A challenge is that borrowers deplete home equity as their loan balance grows over time.
Myth #6: A fixed rate reverse mortgage is always a good idea.
Truth: If you’re like most homeowners, you’ve had a traditional 30-year home loan with a fixed interest rate. This allowed you to know how much you needed to budget for mortgage payments each month. However, this conventional thinking does not apply to reverse mortgages, which do not require any monthly payments. There are several drawbacks to HECM reverse mortgages with fixed interest rates. These loans require borrowers to draw all of their funds out at closing, which means they will pay interest on a potentially large sum of money. This could use up your home equity very quickly. An adjustable rate HECM, on the other hand, gives borrowers the option to select a line of credit and only pay interest on what they use. The line of credit may increase over time if interest rates go up, giving borrowers access to more cash.
Photo courtesy of the National Council on Aging.
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