6 Reverse Mortgage Myths (Episode # 299)

Good afternoon Michiganders

It is Tuesday, March 5th, 2024. And of course, this is Tuesday with Tom, Michigan's only weekly internet show where we do answer your questions about estate planning and estate settlement in Michigan.
And we don't send you a bill.

As always, I'm your host, Tom Doyle, estate planning attorney, lifelong Michigan resident, and ambassador for All Things Good in this great state of Michigan.

Welcome, welcome to today's program.

Well, probably wherever you are in the state of Michigan, over the last week or so, we've had spring come, we've had spring go. Spring seems to be coming back again. And at least it's beginning to feel like winter is more in the rear view mirror at this time in 2024.

Well, looking at last week's episode, what happens if my minor child receives my IRA?

If you have a retirement plan, which many of you do, IRA, 401K, et cetera, and you're wondering what would happen to that plan if your minor child receives it at the time of your death, I encourage you to listen to last week's episode.

Today, six reverse mortgage myths.

That's what we're going to talk about today is six reverse mortgage myths.

But please remember that what I'm about to discuss during the program is, as always, for educational purposes only, it is not intended to be legal or financial advice. You need to work with your attorney, your financial advisor, your tax advisor, et cetera, to determine what is appropriate for you and your estate plan.

Six Reverse Mortgage Myths.

We talked to a lot of elderly clients who have questions about reverse mortgages, or see the televisions, they see the ads on TV, and they get the advertisement in the mail, and they're wondering if that's something appropriate to you.

Well, today we're briefly going to touch upon six myths concerning reverse mortgage. And these are not necessarily in the order of importance, they just happen to be in the order that we're going to talk about them.

So number one, with a reverse mortgage, you immediately sign over ownership of your home.

False.

With a reverse mortgage, you're not signing over ownership of your home, you're maintaining the title to your home, just like you do with a traditional mortgage. You own the home, think about whether the traditional mortgage, you have the deed to your home, you can sell your home, but it has a mortgage on it, and you have to repay the loan that's secured by the mortgage.

Exact same thing applies with a reverse mortgage. You retain the title to your home.

However, just like a traditional mortgage, you do have to meet the loan requirements, such as you have to maintain the property, you have to pay property taxes, you have to have homeowners insurance, perhaps flood insurance, you have to pay the homeowners association dues, all those kinds of things that you're going  to do with a traditional mortgage.

And usually with a reverse mortgage, you also have to avoid extended absences from the home for longer than six months.

But you do own the home, you retain title to your home.

So, false, with a reverse mortgage, you do not immediately sign over ownership to your home.

Second myth, your children won't be left with any home equity if you take out a reverse mortgage.

Well, think about it right now, traditional mortgage. You die, you've got a traditional mortgage on your home, there's equity in your home, that might be going to your children at the time of your death. They're still going to have to pay off the loan, or maybe have the ability to refinance the loan, but they will still be able to receive any equity that you have built up in the home.

Well, the same thing applies with a reverse mortgage.

The real difference is, though, is you have a traditional mortgage where you're making monthly payments, the amount of the mortgage, the amount of the loan that's secured by the mortgage, decreases over time, and that actually then increases the equity that would be in your home.

Well, with a reverse mortgage, the amount of equity can actually decrease over time. With a reverse mortgage, why? Because you're not making payments, and interest gets calculated on the loan, gets added in into the loan, so the loan actually could be going up over time, which causes the amount of equity to decrease.

But that doesn't mean that there won't necessarily be equity when you die.

Now, there's going to be a number of things that are going to get factored into that equity, such as how much appreciation there's been in the value of the home, the length of the loan, optional monthly payments.

We're going to talk about those in a moment, but there still can potentially be equity left in your home for your children. So, it is not true that your children won't necessarily be left with home equity if you've taken out a reverse mortgage.

Myth number three, your children will be responsible for repaying the loan when you die.

No, a reverse mortgage is what they call a non-recourse loan.

And think about your traditional mortgage that you have on your home. You have a traditional mortgage on your home, you die, and the home gets sold. The mortgage will get paid off out of the proceeds from the sale of the home.

Well, the reverse mortgage is what they call a non-recourse loan. Meaning what? That the lender can only be repaid from the proceeds from the sale of the home, and they cannot be paid more than the value of the home. That means there will not be any excess loan, if you will, that your estate would have any obligation to pay, because again, the lender, when you die, the home, if it's sold or when it's sold, can only be repaid from the proceeds of the home, and they can't be paid more than the value of the home.

What does that mean? Well, that means even if the home decreases in value, the maximum repayment amount can only be up to the value of the home.

So, your heirs are not going to be responsible for the loan payment, and they still might actually have the option to refinance the loan if they want to purchase it for themselves.

So, no, your children will not be responsible for paying the loan when you die.

Myth number four, a reverse mortgage requires you to make monthly mortgage payments.

Well, you can, just like your traditional mortgage, where you've got a monthly mortgage payment, you can choose to make monthly mortgage payments, but they're not required on a reverse mortgage.

Probably if you watch the TV ads or you read what you see in the mail, normally the marketing behind the reverse mortgages, you eliminate your monthly mortgage payment, and you can use the money you're otherwise spending on your monthly mortgage payment to do something else. Well, you can, if you wish, choose to continue making mortgage payments if you wanted to with a reverse mortgage, although that's not what most people do with a reverse mortgage, because one of the sale advantages of having reverse mortgage is that you don't have to make monthly mortgage payments.

So no, you don't have to make monthly mortgage payments.

Myth five, you must have your first mortgage paid off before you can qualify for a reverse mortgage.

So you might already have a mortgage on your home. You've been making payments on all this time. You're sitting there thinking, well, geez, maybe if I go get a reverse mortgage, I don't have to make any more mortgage payments. I can use the money for other things.

But what do I do with my first mortgage?

Well, just like if you sold your home, or even perhaps went and got a new mortgage on your home, that first mortgage might have to be paid off at the closing.

Same thing over the reverse mortgage. Any debt on your home's title will have to be paid at the closing.
But you're going to have to have adequate equity in the property, so that by the time you get the reverse mortgage, and they pay off the existing debt, you're still going to have enough equity in your home that it's going to make sense for the lender to enter into the reverse mortgage with you.

So it's not required that your home is, if you will, free and clear before getting a reverse mortgage, but the amount of your current mortgage obviously is going to affect the amount that you're going to be able to receive under your reverse mortgage.

So, your first mortgage, well, it does have to be paid off, but it doesn't necessarily have to be paid off before you qualify for a reverse mortgage.

And myth number six, if you have a reverse mortgage, you're not allowed to sell your home.

False.

Just like a traditional mortgage that you have on your home, you can still sell your home. It just means that the mortgage is going to have to be paid off.

Same thing applies with a reverse mortgage. If you have a reverse mortgage, and when you close on the sale of a home, that reverse mortgage, just like your traditional mortgage, would have to be paid off.

So, no, you are able to sell your home.

And there are normally no prepayment penalties if you choose to pay off that loan on the reverse mortgage early.

So, no, if you have a reverse mortgage, you are still allowed to sell your home.

Now, just these are some of the myths, common myths, hopefully, that helps you in making your decision about whether or not you want to pursue a reverse mortgage.

If you're looking for more information on whether or not you should have a reverse mortgage, please listen to my June 14, 2016 podcast, Is a Reverse Mortgage Right for You?

And if you go to the Tuesday with Tom website, there is a search function where you could simply search for a reverse mortgage and it will call up the June 14, 2016 episode. The podcast show.

Of course, Amanda and I would be happy to have further conversations with you.

If you have other questions, we might be able to help you with, as part of your estate plan, in looking at potentially a reverse mortgage.

Of course, we would also be honored to work with you to create an estate plan to protect your loved ones by either creating a new plan, amending a current plan that you have, or assisting you in settling a loved one's estate.

Remember Doyle Law PC, our website, go to the website whenever you're looking for more information or want to set a consultation with us. There you're going to find the links on the website on how to go about scheduling a virtual consultation via Zoom or telephone or an in-person consultation at the East Lansing office.

Also, reminder too, if you're simply looking for an individual document, maybe all you need is a certificate of trust. You already have property, it's owned by your trust, you're looking at selling that property, or you're settling an estate, the estate has property that's inside a trust that needs to be sold, and all you need is an updated certificate of trust.

Or maybe you're looking at your estate plan and saying, hey, my power of attorney for health care is outdated, I want a new one.

Visit the legal store, there you'll find information on how you can actually order a number of legal documents from our office through the internet, pay for them, and have them delivered to you so that you can print them at home.

So again, all of that information, and much, much more, is going to be found at our website, doylelawpc.com.

Well, that's it for today's show.

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Well, thanks again for spending some of your time with us today.

And as always, I hope that you have an awesome day and an awesome week in Michigan.

Stay safe.

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