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Reverse Mortgage - Myths and Misconceptions

July 6th, 2006

Reverse Mortgage - Myths and Misconceptions


What is it about Reverse Mortgages that instills fear in some Senior Americans?  This feeling is real even when the American Association of Retired Persons (AARP) and nationally syndicated columnists like Robert Bruss continue to praise them in their literature.  The answer may be like that old axiom says “a little bit of knowledge can be a dangerous thing”, and from the fact that many seniors consult friends and relatives who proclaim they know, but in reality are grossly misinformed themselves.

Since the Reverse Mortgage can be a valuable and safe tool for Senior Americans, we will endeavor to correct the major misconceptions connected with them and allow the Senior Citizen to make an informed decision on the use of the Reverse Mortgage.


The first and foremost misconception is that of safety.  Many seniors react to the suggestion of Reverse Mortgage by saying “that’s where you take my home”.  The fact is that the home MUST be in and REMAIN in the name of the borrowers only.  Since the Reverse Mortgage is a mortgage, a lien is placed on the property like all other mortgages.  This assures that the lender will eventually be repaid but for only the amount owed which is principle, interest, and closing costs, again just like any other type of mortgage.

Another fact is that more than ninety-five (95) percent of Reverse Mortgages done are the Federal Housing Administration (FHA) Home Equity Conversion Mortgage (HECM) version.  This guarantees the full protection of the United States Government through use of the required two (2) percent insurance fee paid on all FHA Reverse mortgages.

The remaining, less than five (5) percent of Reverse Mortgages, are the Federal National Mortgage Association (FannieMae) and Proprietary Reverse Mortgages which are guaranteed by private lenders that insure their safety.

The next most heard misconception is that Reverse Mortgages are much costlier than other mortgages.  The truth is that closing costs average only about one (1) percent more than that if a regular FHA mortgage were obtained on the same property.  If you compared the Reverse Mortgage to many other conventional mortgages,

the Reverse Mortgage could actually be lower in cost due to the fact that conventional mortgages can charge more than the two (2) percent origination fee allowed on all Reverse Mortgages.

Another cost factor is of course, the interest rate.  The FHA Reverse Mortgage interest rate is based on the one (1) year United States Treasury Note instead of the prime rate which most conventional mortgages use as their base.  This gives the FHA Reverse Mortgage an interest rate lower than most adjustable conventional mortgages.

Another common misconception, related to the first one mentioned, is that the home goes to the lender after the loan becomes due at death or when the last survivor permanently leaves the home.  This also is NOT the case as value or equity left after payment to the lender, goes to the estate or heirs of the borrower.  This is exactly the same procedure followed with regular conventional mortgages.

Since the Reverse Mortgage is “non-recourse”, the most the estate will be required to pay to the lender is the value of the home at the time of repayment. This is true even if the home value decreased or the borrower lived to an extremely old age.

Also misunderstood are the requirements for obtaining a Reverse Mortgage.  Since no re-payment is made as long as one (1) surviving borrower remains in the home, there are NO income or credit requirements.  Even bankruptcy does not disqualify as long as it has been discharged.  Another requirement is that both spouses must be sixty-two (62) or older with no upper age restriction.  The only other requirement is that the borrowers alone must own the home with no others on the deed.  The home may also be in a revocable trust as long as the eligible borrowers are the only trustees.

All property types are Reverse Mortgage eligible except manufactured (mobile) homes built before June 15, 1976 and co-operatives (Co-ops). Co-ops will be in the future when FHA approves the administrative procedures.  Even homes with existing mortgages that can be paid from the equity can obtain Reverse Mortgages.

Our last myth to dispel is that a Reverse Mortgage is taxable and affects Social Security and Medicare.  That is NOT the case.  Reverse Mortgage proceeds are not taxable because they are not considered income but are, in fact, a loan.  And since the United States Government sets Social Security, Medicare, and FHA Reverse Mortgage rules, they have all been made compatible.

It should be noted that Supplemental Security Income (SSI) and Medicaid may be affected if you exceed certain liquid asset amounts.  A Reverse Mortgage Advisor will show you how to make these programs compatible so getting a Reverse Mortgage will not affect these benefits.

Now that the myths of Reverse Mortgage have been removed, a person may ask, how can I get more detailed information?  Is your local bank the answer?  Nationally syndicated columnist Robert Bruss says “most banks do not offer Reverse Mortgages”.

The American Association of Retired Persons (AARP) has provided more literature than anyone else on this subject and it is very positive.  They have a specific publication called “Home Made Money” which is excellent.  The Federal National Mortgage Association (FannieMae) also offers a publication titled “Money from Home” that is helpful. The National Council On Aging (NCOA) completed a study in 2005 called “Use Your Home to Stay At Home” plus two booklets “A Planning Guide for Older Consumers” and “A Guide for Homeowners Who Need Help Now”. All these and other publications may be viewed and downloaded at www.AmericanReverse.com on the web.

The American Bar Association (ABA) publishes a book “Reverse Mortgages – A Lawyer’s Guide to Housing and Income Alternatives”. The ABA passed a resolution supporting Reverse Mortgages in August of 1995.

If you would like to get specific information on a Reverse Mortgage for yourself or a family member, you can find a lender in your state and in Canada at www.AmericanReverse.com on the internet.

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By W. L. Pulsipher, CSA

W.L. Pulsipher has participated in the marketing and origination of Reverse Mortgages since 1993.  He is President of American Reverse Mortgage (ARM) which exclusively provides Reverse Mortgages and is one of the largest Reverse Mortgage Lenders in the United States.  W.L. is a nationally known authority and a frequent guest speaker on the Reverse Mortgage subject to various service clubs, senior organizations, mortgage associations and mortgage brokers interested in the Reverse Mortgage.  He became a Certified Senior Advisor (CSA) in 2000 and has about sixty (60) other CSA’s on the American Reverse Mortgage staff. The ARM website is www.AmericanReverse.com.

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Important:  The material on Best Syndication is for informational purposes only and is not meant to be advice. You should always seek professional advice before making financial decisions. 
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