Reverse Mortgage MythsThere are a lot of misconceptions about a reverse mortgage. Even mainstream media may have some of their facts incorrect.
- Fees are too high
Reverse mortgage fees may be considered high but when compared with a traditional mortgage, their fees are not too far apart. The origination fee for a reverse mortgage is between $2,000 to $6,000 (2% of the mortgage). A traditional mortgage's origination fee is typically a little over 1% of the mortgage with no cap. This means a home that is $550,000 will cost close to $5,500 in origination fees while it will cost $6,000 for a reverse mortgage.
- Bank becomes the owner of the home
A lot of seniors are worried that a reverse mortgage means the bank or lender now own the property. In fact, this is untrue. The borrower retains legal ownership of the home. Even with the borrower passes on, the borrower's estate owns the property. If the estate wishes to keep the home, they just have to pay off the balance on the reverse mortgage, which becomes due when a borrower passes on or moves.
- I have limited income and can't qualify for a mortgage
While you may not qualify for a traditional mortgage with no or limited income, reverse mortgages do not have any income qualification guidelines.
- I already have a mortgage, so I don't qualify for a reverse mortgage
Many seniors believe if they have a mortgage, they do not qualify at all. Reverse mortgage loans can be used to pay off existing mortgages if a borrower has enough equity in their home already. The actual figure will vary by lenders but most lenders will want you to have enough equity to borrow against. The actual amount you can borrow will depend on the equity available, rates and your age. The older you are, the more you will be able to borrow. For example, on a $250,000 property, at age 62, you will be able to borrow about $110,000 while at age 76, you may be able to borrow as much as $150,000.
- I have to pay taxes on the reverse mortgage payments
Wrong! The money is yours already so you do not owe anything to the IRS. Consult with a financial advisor to make sure. Generally, since you are tapping into your own home equity, you will not pay any taxes on the payments.