By Mike Scarantino
Fueled by an escalating number of Americans who are reaching their retirement years and finding that Social Security benefits are not enough, reverse mortgages are becoming more popular than ever. The loans, which allow seniors 62 and older to tap the equity in their home, do not have to be repaid until the owner dies or sells the home. For this reason, reverse mortgages can be appealing, especially for people with small nest eggs.
The FHA’s Home Equity Conversion Mortgage (HECM) is the most popular reverse mortgage program and is federally insured. All reverse mortgages are regulated by the Department of Housing and Urban Development (HUD), which requires recipients to obtain a certificate from a credit counseling agency before gaining approval from the lender.
Even with these safeguards, some eligible consumers are hesitant to take advantage of the reverse mortgage opportunities because of negative stories they have read or heard. As co-founder and CEO of Florida Household Mortgage and Southern Tier Home Loans, I am striving to dispel the myths.
It is clear why some people are cautious about reverse mortgages. They may not know the facts about these loans.
To explain what reverse mortgages are all about, here are some clarifications:
FICTION: A reverse mortgage is no better than a traditional home loan.
FACT: Unlike a conventional home loan, a reverse mortgage requires no monthly payments. Instead, it is a loan against your client’s home that your client is not required to pay back as long as he/she lives there. The loan is repaid from the borrower’s estate or the eventual sale of the home when the last surviving borrower no longer lives in the home. Your client can receive the money through a lump sum, monthly payments or a line of credit. To qualify, consumers must own and live in the home, and be 62 years old or older.
FICTION: A person 62 or older might have a difficult time qualifying for a reverse mortgage.
FACT: There are no income or credit requirements for a reverse mortgage. There is also no risk of default, and borrowers can receive payments and remain in their homes until they die or are no longer physically or mentally able to reside there. The amount your client can borrow in a reverse mortgage is determined by his/her age, the home’s value and interest rates. The older your client is, the more he/she can borrow.
FICTION: The lender will own your home.
FACT: The bank never takes over the deed unless there is a default. Defaults can occur if the taxes and insurance are not paid current.
FICTION: Only the poorest of homeowners can benefit from a reverse mortgage.
FACT: Today, many homeowners with more expensive homes are turning to reverse mortgages to eliminate larger payments and free up cash in order to invest, travel, pay for college educations, among other expenses.
FICTION: If the homeowners outlive the equity in their house, then they have to pay the mortgage or leave their house.
FACT: Once a reverse mortgage is executed, the residents can never outlive their equity, and the home can not be taken from them. On each reverse mortgage there is an upfront mortgage insurance premium paid to ensure that this never happens and the bank doesn’t lose their money either.
FICTION: If, through a reverse mortgage, my client receives more than the home is worth, my client’s heirs or the estate will be responsible for overages.
FACT: Reverse mortgages are non-recourse mortgages, meaning that the heirs or the estate will never be responsible for any over payouts to the residents.
FICTION: Reverse mortgages cost significantly more than other types of home loans.
FACT: Typically, a reverse mortgage costs approximately one percent more than normal forward mortgages. Compared to most conventional mortgages with monthly payments, reverse mortgages can cost much less in origination fees.
Mike Scarantino is a mortgage industry veteran and a motivational speaker for real estate agents who operates Florida Household Mortgage and Southern Tier Home Loans with his business partner and wife, Deborah Lee Scarantino. You can reach him at 352.650.4864, or by e-mail at [email protected]