Reverse mortgage loans are a helpful tool for seniors to consider as they plan for retirement. They allow seniors to draw on the equity they’ve built in their homes — while still retaining full ownership. Reverse mortgage loans are an excellent alternative to other loan or credit options and are tailored specifically to seniors, but they are often misunderstood by the people who could benefit from them the most. Since they were formally introduced by the federal government in 1989, reverse mortgages have undergone drastic revisions to implement additional consumer protections and regulations. They are a safe and widely used loan option seniors can use to stretch their retirement savings.

Northwest Reverse Mortgage works to dispel myths about reverse mortgage loans and highlight the benefits for seniors. We’re committed to educating clients about their options to secure their finances and lifestyle. Working with one of the nation’s foremost experts on reverse mortgages, seniors could get the tools to take control of their post-retirement finances and continue living independently in the homes they love.

Debunking Myths About Reverse Mortgage Loans

 MYTH 1: The lender owns the borrower’s home.

REALITY: As long as a borrower continues paying property taxes and homeowner’s insurance on their home, maintains it according to the Federal Housing Administration (FHA) or Lender requirements, and lives there as their primary residence, they own it. Even after the proceeds from the reverse mortgage run out, the title belongs to them.

The borrower retains ownership for the life of the loan, and they can sell at any time. The lender cannot foreclose on a home as long as borrowers continue to meet loan obligations. Unlike home equity loans or home equity lines of credit, there are no monthly mortgage payments, so no risk of missing one or defaulting.

MYTH 2: Only desperate or low-income homeowners need reverse mortgages.

REALITY: Not at all. The perception of a reverse mortgage loan appealing as an option of last resort for the cash-poor and house rich has changed. Now, even affluent senior homeowners with multi-million dollar properties and healthy retirement assets use reverse mortgage loans, allowing them to put off or reduce monthly withdrawals from their nest egg. The proceeds from a reverse mortgage loan are non-taxable, allowing for access to cash when you need it, without having to pay taxes on the withdrawal.

The option to retain their retirement savings longer leaves borrowers with more money still in their investment portfolio, which can continue to grow. Delaying withdrawals from a 401(k), IRA or pension plan until older ages leads to higher benefit payouts, which borrowers can use to pay taxes and insurance on their home for years down the road.

Reverse mortgage loans are a strategic financial tool that helps seniors supplement their retirement income, cover financial emergencies, and live at home longer.

MYTH 3: The borrower is restricted on how to use their loan proceeds.

REALITY: Once any existing mortgage or lien is paid off, the net loan proceeds from your reverse mortgage loan can be used for any expense. Many borrowers use it to supplement their retirement income, defer payouts from retirement accounts, pay down debt, cover medical expenses, or make improvements to their property.

Remember, reverse mortgage proceeds come from the wealth that already belongs to the borrower. The funds are taken from the equity in their own home, and they can be used to cover any expense they choose.

Prudent budgeting is critical in retirement. Borrowers should work closely with a financial professional, or their estate attorney to create an understandable and realistic plan for their money after retirement.

MYTH 4: After the borrower’s death, their spouse must move out and repay the loan immediately.

REALITY: For HECM reverse mortgages, Lenders cannot foreclose on a home after the borrower has left the home as long as their spouse continues meeting tax, insurance,

FHA and residency requirements. HECM reverse mortgage loans have protections in place for non-borrowing spouses. For a proprietary reverse mortgage, all owners must be 60 or older and listed as borrowers in order to remain in the home.

MYTH 5: The home must be paid off in order to qualify.

REALITY: Many borrowers use their reverse mortgage loan to pay off the remainder of an existing mortgage. This is an ideal option for retirees with a low balance on their original loan. They can pay it off quickly with reverse mortgage proceeds, continue living in their homes without the monthly mortgage payment, and — for some seniors — defer withdrawing from retirement savings until a later, more advantageous age. Meanwhile, their home continues to appreciate in value, generating additional equity that can be passed on to the borrower’s spouse, heirs, or estate.

MYTH 6: Borrowers pay taxes on loan proceeds.

REALITY: Reverse mortgage loan proceeds are just payouts from the borrower’s own equity and are not considered income, so they are tax-free.

Interest and fees associated with reverse mortgages are tax-deductible. Borrowers who receive proceeds as a lump sum or monthly payouts will pay interest and fees when the loan comes due and can deduct them during that tax year. Those who choose a revolving line of credit and complete payments before the loan comes due can claim interest during the same year.

Seniors should always consult with a financial advisor when considering a reverse mortgage loan to be aware of the potential impact on their taxes or government benefits.