When seniors need to free up cash, they often look to their retirement plans. Many don't even consider tapping into the value of their homes – a feat easily achieved through the use of a reverse mortgage.
A reverse mortgage is a loan that allows homeowners aged 62 and older to convert part of the equity in their homes into cash. But it's not an incredibly common type of loan, making it easy for misinformation and myths to spread.
Here are a few of the most common myths about reverse mortgages.
Myth #1: Reverse Mortgages Are a Scam
Because reverse mortgages are popular with the elderly, people are often suspicious of them. Even though you may see ads for reverse mortgages on late-night TV infomercials, that doesn't make them a scam.
Reverse mortgages are a popular option for those 62 and older who are house-rich and cash-poor. These are people who don't have enough liquid assets for retirement, but have a lot of equity in their home.
Instead of selling their house and living on the proceeds, seniors use reverse mortgages to remain in their beloved home while getting access to funds they didn't have previously.
Myth #2: I'll Lose My Home
While the senior is in the home, their name is on the title and they retain full ownership. Reverse mortgage expert Jason Eichmiller said the only way boomers can lose their home is if they stop paying property taxes or homeowner's insurance.
CFP Tom Diem of Diem Wealth Management said the homeowner must also take care of any prominent repairs so that the house retains its value.
Even so, Diem says not to worry. "This caveat should not pose a problem," he said. "The lender will notify the owner and give them time to complete the repair."
Myth #3: I Have to Have 100 Percent Equity
You do not need to have your house paid off entirely to qualify for a reverse mortgage. In fact, there's no standard amount of equity that lenders require.
For example, the Department of Housing and Urban Development's reverse mortgage program stipulates that you "own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan."
Some lenders may be more forgiving about equity, so look around if you fail to qualify initially.
Myth #4: My Children Will Have to Repay the Loan
Many seniors are concerned with leaving behind a legacy for the next generation, and worry that a reverse mortgage could negatively affect their children.
Fortunately, reverse mortgages are "non-recourse" loans, meaning your heirs will not be liable. Only the house itself can be used to settle the loan – even if its value is now less than the balance on the reverse mortgage.
Myth #5: My Spouse Will Get Kicked Out if I Die
This concern is a common reason why married seniors avoid reverse mortgages. For all the potential benefits of this type of loan, the thought of leaving your significant other out in the cold is enough to scare away just about anyone.
Thankfully, seniors needn't worry.
Eichmiller says this myth was once true, but isn't anymore. If your name is on the reverse mortgage and you pass away first, your spouse will be able to stay in the home (provided they keep paying property taxes and homeowner's insurance) until they die.