Reverse Mortgage Myths Debunked: You Still Own Your Home and Have Home Equity

For some homeowners over 62 years old, a reverse mortgage can be a great option for improving retirement finances and quality of life. There are, however, quite a few misunderstandings when it comes to these complex financial products. In this article we will debunk a couple myths so you can more clearly decide if a reverse mortgage is right for you.

Myth #1: “I’m handing over the title to my home when I get a reverse mortgage”

Over the past few years, we’ve asked around 75,000 people the following question:  Who owns your home when you have a reverse mortgage? Only about half — 48% — have answered correctly: When you get a reverse mortgage, you continue to own your home. Three percent of respondents think it immediately goes to heirs and a slight majority — 49% — believe the title is handed to a bank, government agency or mortgage lender. This is not at all true. So why is this myth about home ownership and reverse mortgages so pervasive? What we hear most frequently from consumers is that they believe getting a reverse mortgage is essentially selling your home for the amount you can borrow. However, a reverse mortgage is a loan — a home equity loan — that allows you to stay in your home as long as possible without making monthly mortgage payments. Instead, any amount you borrow accrues interest over time, and the loan balance must be repaid when you move out of the home.

Myth #2: “I’m selling my house for less than half the value”

First, as stated above, when you get a reverse mortgage you are not selling your home, you are getting a loan. You are borrowing — as a general rule of thumb — somewhere around half the value of your home equity and the remaining value is wholly yours. To help you understand how this works, let’s walk thru two use cases — full and partial reverse mortgage payouts. Full Payout with $100k Traditional Mortgage that Must Be Paid Off In this example, the user has a mortgage that must be paid off, eliminating monthly mortgage payments.

• Age: 67
• House Value: $350,000
• Mortgage Balance before Reverse Mortgage: $100,000
• Reverse Mortgage Loan Interest and Fees: 5%
• Annual Property Value Growth Rate: 3%
• Amount Available to Borrow Today: $165,000
• Estimated Closing Costs: $15,000
• Cash Payout at Closing: $165,000 – ($100,000 for paying off existing mortgage + $15,000 in closing costs) = $50,000

Prior to getting a reverse mortgage, this homeowner had $250,000 in home equity — the amount of cash that could be received if selling the home today for $350,000. After taking out the loan, the homeowner’s home equity has dropped to $185,000, which is the house value minus the new reverse mortgage loan balance. In the chart below you can see what happens to home equity over time. By age 72, it is just over $200,000. When you factor in the $50,000 cash payout at closing, then within five years the conservative growth in home value (3%) has already offset the fees and accrued interest on the reverse mortgage. Within 10 years, home equity is up to $224,000. In summary, getting a reverse mortgage for this homeowner:

• Pays off the existing mortgage, improving monthly cash flow
• $50,000 is immediately available to be used however desired
• In about 5 years, home equity is great enough that if the house were sold they would receive about the same as selling the house today (when including the original $50k payment)
• By age 92, the homeowner has a reverse mortgage balance of approximately $500k, but also home equity of $275,000 available if the house were to be sold or given to heirs.

So in this use case, the homeowner is not selling the home for the loan amount of $165,000. They are accessing much needed cash, lowering their monthly burn, and continuing to grow their net worth over time.

Reverse Mortgage Payout When House is Free and Clear

For this second example, we’ll use all the same details except this homeowner does not have a mortgage and only wants to access a small amount now — $25,000. The rest will be available as a line of credit for emergencies and portfolio management.

• Age: 67
• House Value: $350,000
• Mortgage Balance before Reverse Mortgage: $0
• Reverse Mortgage Loan Interest and Fees: 5%
• Annual Property Value Growth Rate: 3%
• Amount Available to Borrow Today: $165,000
• Estimated Closing Costs: $15,000
• Cash Payout at Closing: $25,000
• Remaining equity in a home equity line of credit: $125,000

Prior to getting a reverse mortgage, this homeowner had $350,000 in home equity since there were no loans against the property. After taking out the loan, the homeowner’s home equity has dropped to $310,000, which is the house value ($350,000) minus the new reverse mortgage loan balance ($25,000 cash payout plus $15,000 in closing costs). In the chart below you can see what happens to the home equity over time. By age 72, it is just over $360,000. In other words, within five years the conservative growth in home value (3%) has already offset the fees and accrued interest on the reverse mortgage. Within 10 years, home equity is up to $420,000. Meanwhile, the line of credit continues to grow. At closing, the owner could have accessed an additional $125,000. By age 72 this amount is $157,000. The line of credit continues to grow regardless of what happens with the housing market. Therefore, even if there is a correction and house values drop, the line of credit still increases — effectively locking in the value of the home to the owner. In summary, for this homeowner:

• $25,000 is immediately available to be used however desired
• The line of credit is immediately available to cover any needs that arise
• By age 92, the homeowner has a reverse mortgage balance of approximately $125k (assuming no future withdrawals), but also home equity of $665,000 available if the house were to be sold or given to heirs.

Would You Benefit from Getting a Reverse Mortgage?

You hopefully now have a better understanding of how a reverse mortgage works. However, the examples above are mere estimates with some guesswork — no one knows what will happen to interest rates and home values over time. What is clear is the following:

1. Reverse mortgage loans are not cheap — the closing costs are high due to many factors.  However, they are less of a factor if you consider the loan over the long haul. You should also shop around since fees vary between lenders.
2. The benefits of this loan aren’t limited to immediate cash available; home equity preservation, paying off your existing mortgage and access to a line of credit have significant value to homeowners

If you would like to learn more or get an estimate, visit our reverse mortgage learning center, or estimate your loan amount. If you would like to talk to someone about this and perhaps get your own forecast, feel free to call us at 1-800-935-5587.