Misconceptions don’t only lie in the minds of older homeowners. Occasionally reverse mortgage originators unwittingly reinforce them. While simple anecdotes and analogies are convenient simplifying the explanation of a complex loan, they can sow the seeds of misunderstanding.
Here are just a few of the simple yet misleading explanations that have been touted for reverse mortgages:
- A reverse mortgage gives you a portion of your home’s equity. FACT: If that truly were the case, the available proceeds would be considerably less. A portion of the borrower’s home value is provided to qualified homeowners.
- A reverse mortgage generates monthly ‘income’. FACT: A reverse mortgage can NEVER generate income. It can generate loan proceeds. Income increases one’s net worth. A reverse mortgage does no such thing.
- It’s tax-free income. FACT: The reason reverse mortgage funds are generally not taxable is that they are not income by any definition. See #2.
- You can live in your home for the rest of your life. FACT: Only if the borrower meets the ongoing requirements of the loan or does not move into an outside long-term care facility.
- You can’t outlive the loan. FACT: Yes you can if the homeowner is in default OR they exhaust the available funds of the reverse mortgage. Both can be easily seen by the borrower as ‘outliving the loan’.
- Your Lifetime Expectancy Set Aside will pay your property charges until you die. FACT: LESA set-asides can run out of money if the borrower lives longer than the money in that account would pay property charges.
- The line of credit grows continuously with no limitations. FACT: The principal limit (or line of credit) typically increases each month but in some cases, it can actually decrease!
- You only need to have enough equity to qualify. FACT: Applicants must pass a financial assessment and have to meet other qualifications at the time of application.
- A HECM is a way to leverage your wealth. FACT: Leverage typically means one uses different financial assets to increase the value of another investment. Precise language is important. A more accurate explanation would be that a reverse mortgage is a way to tap into a portion of your housing wealth or the home’s value.
- A fixed-rate reverse mortgage is the best choice. FACT: Like any mortgage, the type of loan and how it’s structured should be based on the unique needs of the homeowner. Do they need the supplemental cash flow now or at some time in the future? If so, a fixed-rate loan would be the worst choice as they would have no access to a line of credit (principal limit). If the homeowner is starting with a low balance a fixed rate would unnecessarily accelerate their loan balance. Are they using nearly all the available proceeds after paying off the home and the initial draw? In such a situation a fixed-rate loan may be the best choice as it’s more likely that interest rates will go up in the future rather than down.
Regardless of our experience, it is always wise to reexamine the words we use when communicating with older homeowners, family members, and financial professionals. Are they accurate, confusing, or misleading? Will they create potential headaches in the future for the homeowner or your lender? The answer truly depends upon the accuracy and clarity of your communications.
What misleading explanations of reverse mortgages are you seeing? Leave your comments below.