10 Common Myths About the FHA Reverse Mortgage

The FHA Reverse Mortgage program which most often goes by the name of HECM has more than doubled in recent years. As more seniors and their advisers seek information about this popular loan program the internet fills with bad or misleading information. Here's a count down, David Letterman style, of the 10 most common myths about reverse mortgages and the actual facts to help you make a smart choice.

By the way HECM is short for Home Equity Conversion Mortgage.

Myth # 10 - It´s cheaper to move to a smaller house.

While this strategy might be right for different reasons, seniors need to analyze their costs carefully before making this assumption. The process of selling a home and moving into a new home can be expensive. The typical real estate commission of 6% on a $300,000 home would be $18,000. Add moving costs, and the undertaking to find a new home and the decision is not as simple.

Myth # 9 - Children want the home or don´t feel comfortable with their parents obtaining a reverse mortgage.

I often get calls from the children of seniors inquiring about reverse mortgages for their parents. I encourage clients to talk with their children about their decision. Many baby boomers are faced with trying to plan for their retirement and pay for a childs education. Often, the children of many seniors are happy that their parents have a financial solution available to help them live more independently and financially secure.

Myth # 8 - The borrower could end up owing more than the home is worth.

HECM products are insured by the FHA or Federal Housing Administration, an arm of the U.S. Department of Housing and Urban Development (HUD). HECM (Home Equity Conversion Mortgage) non-recourse loans.

This means that even in the event the home loses value the borrower or their heirs cannot owe more than the value of the home.

This makes reverse mortgages one of the safest loans for seniors. Traditional mortgages and home equity loans don´t offer these safe guards.

Myth # 7 - Loan proceeds will impact Social Security and Medicare benefits.

Reverse equity loan proceed will generally not affect regular Social Security payments or Medicare benefits. It is recommended that the borrower speak with his or her financial advisor and appropriate governmental agencies.

Myth # 6 - There are restrictions on how the money is used and taxes will have to be paid on it.

Actually there are no restrictions. The cash proceeds from can be used for any purpose the borrower sees fit. My clients have used reverse mortgages to travel, pay off debts, help their kids, make a luxury purchase or just live more comfortably.

Myth # 5 - Once the proceeds are received, taxes will need to be paid.

The cash proceeds from a reverse mortgage are tax-free because it is already your money. It is recommended that the borrower consult with a financial advisor.

Myth # 4 - They are only for seniors in need, or for the ´house rich, cash poor.´

The FHA reverse mortgage is an excellent financial planning tool that has been used by homeowners from all walks of life to enhance their retirement years.

I receive more and more calls from senior homeowners whose properties exceed the current FHA lending limits, of $625,000. Many seniors with luxury homes are using reverse mortgages as part of their estate or legacy planning in conjunction with advice from financial advisers. My average client has a home in the $400,000 to $600,000 range.

You can find detailed information about reverse mortgages, and even have a HUD approved lender contact you by visiting the website at How Do Reverse Mortgages Work.