Are Reverse Mortgages Misunderstood?

House with reverse arrows (Are reverse mortgages misunderstood)

Mutual of Omaha survey shows retirees may be missing out due to misperceptions

Every day, thousands of retirees head into what should be their golden years saddled with a combination of debt and little money in savings. But what many may not know is they may be sitting on — or more specifically, living in — a significant source of income that could make retirement more enjoyable.

According to the U.S. Census Bureau, home equity represents about two-thirds of an average retiree’s net worth.1 But this asset often goes untapped by older homeowners who may benefit from the funds it could provide.

A reverse mortgage is one tool homeowners aged 62 and over can use to tap into this often-overlooked source of income.

“Access to cash is a critical part of a retirement plan, especially when retirees are faced with inflation, unexpected expenses and longer lifespans,” said Shelley Giordano, director of Enterprise Integration for Mutual of Omaha Mortgage.

“Our research shows most consumers are uninformed about the ways a modern reverse mortgage can help retirees use their home equity to guard against these challenges as a part of their overall retirement plan.”

A recent survey conducted by Mutual of Omaha Insurance Company shows many homeowners are unfamiliar with or have little knowledge of reverse mortgages (74%) and many others have misperceptions about how they work.

Just 2% say they currently have a reverse mortgage, have had one in the past or plan to get one in the next year.

Of the survey respondents who say they have some knowledge of reverse mortgages, 40% wrongly believe taking out a reverse mortgage would mean their heirs won’t inherit their home, and 22% wrongly believe they would no longer own their homes.

Misperceptions Persist
In short, a reverse mortgage is a loan to a homeowner taken from the equity in their home. It’s negatively amortizing, meaning the balance grows month to month because interest payments are deferred. Interest not paid is added to the amount due and the following month’s interest is calculated on the new, higher loan balance.

The 100th United States Congress initiated the modern reverse mortgage with the 1987 Housing and Community Development Act, and it was signed by President Ronald Reagan in February 1988. 2

Under this act, Congress tasked the Department of Housing and Urban Development (HUD) with designing a reverse mortgage that protected older homeowners but at the same time encouraged private lenders to provide reverse mortgages to seniors. 3

To try this out, HUD published a notice asking potential lenders to participate in a demonstration program that “will insure up to 2,500 reverse mortgages on the homes of elderly homeowners, enabling them to turn their equity into cash.” 4

Under the HECM Insurance Demonstration, the modern reverse mortgage for homeowners 62 or older was born.  For three decades, American homeowners have been able to borrow their hard-earned home equity safely without the need to make monthly payments. 5

Despite the addition of many safeguards over the years, such as full fee-disclosures, some common misperceptions persist.

“I still believe reverse mortgages relieve homeowners of some of their rights,” said one survey respondent.

Another noted they “don’t like the idea of not being able to leave the house to heirs.”

“Based on what I’ve heard, my monthly mortgage payments would be paid by someone else, I would continue to be able to live in the home. They would own the home if I died; the home would no longer be mine,” said another respondent.

The Four Myths of Reverse Mortgages
The financial industry and the industry media have fallen short when it comes to educating homeowners and financial advisors about the consumer safeguards built into today’s reverse mortgages, said Giordano, who is also the founder of the University of Illinois’ Academy for Home Equity in Financial Planning and the author of the book “What’s the Deal with Reverse Mortgages?”

In her book, she clears up some common myths that continue to be associated with reverse mortgages.

Myth No. 1: The Bank Gets the House
A reverse mortgage is like a traditional mortgage — except with a deferred payment. When the borrowing homeowner leaves their home, the heirs can opt to pay the mortgage (never more than 95% of the home value) using their own financing to retain ownership of the house. They can also elect to sell the home and keep any remaining profit.

Myth No. 2: Heirs Are Left with a Debt
Because loan documents clearly spell out that “no deficiency judgement may be taken against the borrower or the estate,” heirs are free to sell the home to cover the loan value and to keep any remaining equity.

Myth No. 3: You Have to Leave the House Before You’re Finished Using It
Ok, technically a reverse mortgage has an end date — the 150th birthday of the youngest borrower. So, it’s doubtful anyone will ever have to worry about this being a factor.

Myth No. 4: Monthly Payments Are Required
Unlike a traditional mortgage, a reverse mortgage doesn’t require any monthly payments, which means the house will not by foreclosed on due to missed payments.

The only requirements for the homeowner are to pay the taxes, insurance and HOA fees and to maintain the condition of the property, just like any mortgage.

The Benefits of a Reverse Mortgage
Because a reverse mortgage can benefit a broad range of retirees — from those struggling to get by to the more affluent — it’s time homeowners and financial advisors alike stop thinking of them as only a last-resort option, Giordano said.

“A reverse mortgage can help ease the uncertainties a long retirement inevitably will bring by offering unique features unmatched by other lending opportunities, Giordano said. “Its flexibility as a revolving line of credit that cannot be cancelled, frozen or reduced makes it a superb backup plan for many folks, including those quite privileged.”

With the money from a reverse mortgage, homeowners can pay off an existing mortgage or other debts or purchase a more age-appropriate home.

While a wide range of retirees could potentially benefit from taking out a reverse mortgage, it’s not necessarily the right choice for everyone, Giordano said. For example, people planning to move out of their home in the next five years probably should not consider taking out a reverse mortgage.

To ensure a reverse mortgage is the right solution for you and your family, she recommends speaking to at least two lenders to compare proposals and to never allow a salesperson to hurry your decision. If you have a trusted family member, friend or professional, the salesperson should be happy to include them in all discussions.

Mutual of Omaha surveyed 400 U.S. consumers over the age of 60 from April 13-25, 2023, via the quantilope survey platform.

Respondents were asked to describe their current financial needs and to rate their knowledge of reverse mortgages. Those who said they had knowledge of reverse mortgages were asked what having a reverse mortgage would mean to them and what need would be best met by having a reverse mortgage.

Are Reverse Mortgages Misunderstood?

For more information on how reverse mortgages work, and the costs in setting one up, the National Council on Aging provides this free booklet approved by the Department of Housing and Development.

1 U.S. Census Bureau, Survey of Income and Program Participation, Wealth Tables 2021, Table 1. Median Value of Assets for Households 2021





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