5 Myths About Reverse Mortgages

Retirement planning can be a daunting task for many Americans, especially those who are concerned about having enough cash to support their lifestyle. However, one option that is often overlooked is the use of reverse mortgages to supplement income in retirement. While reverse mortgages have been met with skepticism and misconceptions in the past, they can actually be a valuable tool when used appropriately.

According to Zachary Barton, a certified financial planner and founder of Barton Financial Group, reverse mortgages are not a one-size-fits-all solution, but they can be beneficial for those who understand how they work. In a 2024 survey, 62% of older homeowners agreed that reverse mortgages offer more financial freedom in retirement if used correctly.

One common myth about reverse mortgages is that they are shady or predatory. However, financial regulators have introduced consumer protections over the years, particularly for Home Equity Conversion Mortgages (HECMs), the most common type of reverse mortgage. Today’s reverse mortgages are far different from the infomercials of the past, but their reputation still lingers. Barton emphasizes the importance of educating clients about the benefits and risks of reverse mortgages over multiple meetings to ensure they are comfortable with the decision.

Another misconception is that reverse mortgages are a last resort for those who have run out of options. In reality, reverse mortgages can be used to diversify retirement portfolios and provide a steady income stream, even for those with adequate savings. Studies have shown that utilizing a reverse mortgage line of credit at the start of retirement can significantly increase the likelihood of financial success over a 30-year period.

One of the most common concerns about reverse mortgages is their cost. While there are upfront fees involved, borrowers can roll these costs into the loan amount and are not required to make recurring payments. The loan balance increases over time with interest and fees, but borrowers or their estate will never owe more than the home is worth.

Contrary to popular belief, heirs can inherit a home with a reverse mortgage and even receive certain benefits. They have the option to sell the home, pay off the reverse mortgage, or keep the home by obtaining a new mortgage. If the loan balance exceeds the home’s value, heirs only need to repay 95% of the home’s worth, providing a potential discount on the property.

Lastly, the misconception that reverse mortgage borrowers no longer own their homes is false. While lenders have a lien on the home, borrowers maintain legal ownership and must meet certain requirements, such as living in the home full-time and keeping up with maintenance and taxes.

In conclusion, reverse mortgages can be a valuable tool for supplementing income in retirement when used appropriately. By dispelling common myths and understanding the benefits of reverse mortgages, retirees can make informed decisions to secure their financial future.