Top 10 Misconceptions Regarding Reverse Mortgages Exposed
06/01/2010 Confused by all you hear about reverse mortgages? Looking for the best interest rates? Lots of homeowners are. Here we attempt to separate truth from myth. 10. Funds acquired via reverse mortgages are taxable. False. Based on information obtained from a reverse mortgage guide published by the American Bar Association, loan advances are typically not considered income by the IRS. Reverse mortgage funds are derived from equity which belongs to the homeowner and is available for the homeowner's use.
9. Social Security and Medicare eligibility will be impacted by a reverse mortgage. False again. Payment of benefits to which an eligible individual is entitled under the Social Security Act including retirement, disability, survivor, and Medicare are not affected by a reverse mortgage. However, eligibility for Supplemental Security Income and other programs based on need may be affected should reverse mortgage advances not be spent during the month in which they are received.
8. Once chosen I cannot change the payment option. False. Choosing one of the four reverse mortgage payment options does not permanently lock you into that option. Should your needs change, you can switch to a different payment option by paying a nominal fee. Knowing more about the options in advance - lump sum, term payment, tenure payment, or line of credit - helps you make the right decision.
7. Use of reverse mortgage funds is restricted. Not true. The money belongs to you and you can spend it however you choose. You can take a vacation, purchase a vehicle or second home, cover medical bills, put it towards an education, even buy groceries.
6. Income and credit determine eligibility. Borrowers are not required to make payments so lenders do not rely on income and credit score to determine eligibility. However, a credit review is conducted before approval to ensure the property's title is free of encumbrances. Interest rate, home value and a borrower's age determine reverse mortgage eligibility.
5. My heirs will have a large debt upon my death. This is false. Even if your property loses equity, heirs are never required to owe more than the home's worth because reverse mortgages are considered non-recourse. Mortgage insurance further protects heirs.
4. The lender will seize my home upon my death. False. Heirs have 12 months after your death to repay the loan using proceeds from the home's sale or a conventional mortgage.
3. Living in my home too long or owing more than the home's value can lead to my eviction. False again. Maintain the property, make timely insurance and tax payments, and use the home as your principal residence and the lender won't take it . 2. Reverse mortgage eligibility requires free and clear ownership. Another reverse mortgage misconception. Having a mortgage balance does not make you ineligible for a reverse mortgage. You could even use the reverse mortgage to pay off your traditional mortgage and eliminate your monthly mortgage payment. 1. A reverse mortgage transfers ownership of my home to the lender. Totally false. You hold title to your home and can do with it what you want. You can even sell it and repay the balance.
