3 Common Misconceptions About Reverse Mortgages

When planning for retirement, homeowners may consider reverse mortgages to help round out their long-term finances. Also known as a home equity conversion mortgage (HECM), this type of loan is often overlooked due to several major misconceptions that surround it.

Misconception #1: HECM Withdrawals Are Considered Income

When homeowners take out a traditional forward mortgage, they pay back a monthly sum to the lender. Reverse mortgages instead draw on existing equity in the property that allows borrowers to withdraw money either as a large percentage or budgeted amount. Borrowers can also set up the loan as a line of credit for later use. Homeowners may then spend the funds however they see fit.

This converting equity into available cash may act like income, but it is still a loan nonetheless. As a result, withdrawals are not taxed and are not taken into consideration for Social Security benefits.

Misconception #2: Homeowners No Longer Own the Home

Borrowers are still the homeowners and are still responsible for home insurance, upkeep and property taxes. The property can be sold or inherited much in the same way as with any home with an existing mortgage. The HECM is then repaid through the sale of the home or by another method of financing.

Misconception #3: Both Co-Borrowers Must Remain in the Home

Anyone listed on the title of the property should be a co-borrower on an HECM. Both borrowers can then draw on the home equity to meet their living expenses, healthcare costs and other goals as they wish. While it is true that the property must be the principal residence, it only needs to be the principal residence for at least one co-borrower. The loan is not due until all co-borrowers no longer live in the home.

Many factors must be weighed before deciding if an HECM is beneficial, however, and are highly dependent on individual finances. Meeting with a financial advisor may provide more insight on what role reverse mortgages can play in long-term retirement financial planning.