Monday, November 15, 2004

Common Misconceptions About Reverse Mortgages

• The borrower(s) must sign their home over to the bank. -- NO.
The title to the property does not change. A reverse mortgage is just a lien, the same as a traditional mortgage or home equity line. The borrower retains full disposition rights to their property. If the borrower(s) decide to sell or transfer their home, the reverse mortgage balance will be repaid or refinanced (as would any traditional mortgage balance)

• The bank will take the home upon death of the borrower(s). -- NO.
At the time of the borrower(s) death, the property will enter probate and the beneficiaries can either refinance the balance of the reverse mortgage and keep the home, or sell the property, whereupon the loan is repaid and the remaining equity belongs to the estate.

• The borrower(s) can withdraw most or all of the equity out of their home. -- NO
The borrower(s) cannot withdraw all of the equity in their home. The lender determines the loan amount. The older the borrower(s), the larger the loan amount that will be made available. Seniors can receive the proceeds as a lump sum, a line of credit, a monthly payment, or any combination of these options.

• Closing costs are extremely high. -- NO.
For some reverse mortgage programs, the closing costs are significant, but still far less than one year of typical appreciation on a $300,000 home. Some programs require a one-time mortgage insurance premium payment that protects the homeowner and the lender. There are some private reverse mortgage programs that have little or no up-front closing costs. All closing costs (if any) are withdrawn from the gross loan amount, so that the borrower(s) need not bring a check to the closing.

• Interest rates are high and are charged on the total loan amount. -- NO.
Interest rates are low -- currently around 3.80% (11/2004) on some programs. All reverse mortgage programs are adjustable rate loans. All have lifetime interest rate caps. Interest is only charged on the borrowed loan amount – not the total loan available.

• Money received is reportable and can affect the homeowners' current government benefits. -- NO.
Proceeds from a reverse mortgage are not considered income (by the IRS) and therefore do not affect the benefits from Social Security, Medicare and are not generally subject to attachment by Medicaid.

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