10 Reverse Mortgage Myths

Myth 1: The Bank Takes Your Home

The fear is understandable. Ads talk about "turning your home into cash," and family stories often skip the details. Under a HECM, the title stays in the borrower's name. The CFPB says so directly: "the title to your home remains in your name."

The lender holds a lien instead. A lien is a legal claim against the property that secures the loan, the same as with an ordinary mortgage. A lien is not ownership.

Here is the grain of truth. The loan does come due when the last borrower dies, sells or permanently moves out. Then the balance must be repaid, usually from a sale of the home. If the loan is not repaid when due, or if the borrower stops meeting the loan's duties, the lender may foreclose. The CFPB warns: "You could face foreclosure if you run out of money to pay property taxes, insurance, or other housing-related expenses."

Keeping title therefore depends on keeping up with taxes, insurance and repairs.

Myth 2: Your Heirs Will Be Left With Nothing

For a son or daughter, this is often the first worry. When the loan comes due, the debt is repaid first. Whatever value remains belongs to the estate and the heirs.

HECMs are non-recourse loans. That means the debt can be collected only from the home, not from the borrower's or heirs' other money. The statute provides that the homeowner "shall not be liable for any difference" between what is owed and what the lender recovers from the net sale proceeds or from FHA insurance (12 U.S.C. § 1715z-20(d)(7)).

The CFPB explains the heirs' choices when there is no coborrower or eligible nonborrowing spouse:

• To keep the home, heirs must pay the full loan balance. They might obtain their own loan to buy it.
• To sell the home, they must repay the full balance, or at least 95 percent of the appraised value if the balance is higher than the home's value. They keep any money left after the loan is repaid.

After a due-and-payable notice, heirs have 30 days to buy, sell or turn the home over to the lender. The CFPB says this might be extended up to six months to sell or arrange a loan.

The honest trade-off is this. Interest builds on interest, so the longer the loan runs, the less equity tends to remain. More on reverse mortgages and heirs is worth reading as a family.

Myth 3: A Home Has to Be Owned Free and Clear

An existing mortgage does not, by itself, rule a homeowner out. According to the CFPB, a borrower must either own the home outright or have a low mortgage balance that can be paid off at closing. That payoff can come from "your own funds or money from the reverse mortgage."

A HECM must be a first mortgage, as the statute defines it (12 U.S.C. § 1715z-20(b)(3)). So once the old loan is paid off, the reverse mortgage becomes the lien in first position.

What if the old balance is larger than the amount the reverse mortgage would make available? Then the homeowner would need to bring cash to closing to cover the difference. Whether the proceeds would be enough depends on the person's own facts, and the lender determines that.

Owning the home outright raises its own questions, set out in a reverse mortgage on a paid-off house.

Myth 4: A Reverse Mortgage Is a Last Resort for Desperate Homeowners

Is it only for people in trouble? The program's purpose, written in the statute, is broader. It speaks of "reducing the effect of the economic hardship caused by the increasing costs of meeting health, housing, and subsistence needs at a time of reduced income" (12 U.S.C. § 1715z-20(a)(1)).

Past marketing aimed at homeowners in distress shaped the product's reputation. Retirement-planning writers have since discussed it as one possible piece of a wider income plan.

A homeowner might look at it ahead of time for several reasons:

• to add to retirement income
• to cover living costs while waiting to claim Social Security
• to pay for changes that make aging in place safer
• to handle a large expense

The CFPB also notes limits. A reverse mortgage "is an expensive way to cover short term cash needs" if a move may come soon. Taking one out too young can mean less money later.

It remains one option among several. Others include a home equity loan or line of credit, a cash-out refinance (a new, larger mortgage that pays off the old one and releases cash), downsizing, and lowering expenses. Each trades something different, as reverse mortgage vs selling your home lays out.

Myth 5: The Lender Can Force You Out of Your Home

The lender has no general power to end the loan whenever it likes. The statute requires that repayment be deferred "until the homeowner's death, the sale of the home, or the occurrence of other events specified in regulations." For this purpose, the "homeowner" includes the homeowner's spouse (12 U.S.C. § 1715z-20(j)).

HUD's regulation lists when the loan becomes due. It is due if a borrower dies and the home is not the principal residence of a surviving borrower, subject to a deferral for an Eligible Non-Borrowing Spouse. It is also due if a borrower conveys all title and no other borrower keeps title.

With the approval of HUD's Commissioner, it can also become due when any of these happen (24 C.F.R. § 206.27(c)):

• the home stops being a borrower's principal residence for reasons other than death, and no other borrower lives there
• a borrower is away for longer than 12 consecutive months because of physical or mental illness, and no other borrower lives there
• the borrower does not pay property charges
• the borrower does not perform another duty under the mortgage

Falling behind on taxes or insurance is a real risk, and it is the part of the myth that holds some truth. Lenders review a borrower's finances before approval. In some cases, part of the loan may be set aside to pay taxes and insurance, often called a Life Expectancy Set-Aside. The statute lets HUD set mortgage terms on "payment of taxes" and a "default reserve" (12 U.S.C. § 1715z-20(d)(8)).

Myth 6: Reverse Mortgages Are Too Expensive

The costs are real, and they are worth understanding in plain words:

• Origination fee. This is the lender's charge for making the loan. Federal rules limit it, it may be fully financed with the mortgage, and the lender discloses the actual amount.
• Closing costs. These are third-party charges such as title work and an appraisal.
• Mortgage insurance premium (MIP). The statute lets HUD impose premium charges. The CFPB explains that when a home sells for less than the balance, "the rest of the loan is covered by the mortgage insurance that the reverse mortgage borrower paid." That insurance is what supports the non-recourse protection for borrowers and heirs.
• Interest. Interest is added to the balance over time.

The FTC puts it plainly: "A reverse mortgage increases your debt and can use up your equity."

The law also requires disclosure. Before closing, the lender must give a statement of the projected total cost of the loan. Every year, by January 31, it must give a statement showing what was paid out, the deferred interest added, and the balance (12 U.S.C. § 1715z-20(e)). Separately, the borrower must receive full disclosure of all costs, including which charges are required to get the loan and which are not.

Costs make the most sense when set against the alternatives. Selling has its own costs. A home equity loan usually means monthly payments, as reverse mortgage vs home equity loan compares.

Myth 7: Reverse Mortgage Proceeds Are Taxable Income

This question comes up often, and the honest answer has two parts. Reverse mortgage proceeds are borrowed money, not wages or earnings. The FTC says that "typically, the money you get through the reverse mortgage is tax-free and won't affect your Social Security or Medicare benefits."

"Typically" matters. This page is general information, not tax advice. A tax professional can say how the rules apply to a person's own situation.

Means-tested programs raise a separate question. These are programs that count a person's income or assets, such as Supplemental Security Income (SSI) or Medicaid. The HECM statute requires counselors to disclose that a HECM "may have tax consequences, affect eligibility for assistance under Federal and State programs, and have an impact on the estate and heirs" (12 U.S.C. § 1715z-20(f)(4)). The agency that runs a given benefit, or a benefits counselor, can answer how the money would be treated.

Myth 8: Any Homeowner Over 62 Qualifies Automatically

Age opens the door, but it is not the only requirement. "The youngest borrower shall be 62 years of age or older at the time of loan closing" (24 C.F.R. § 206.33).

The other conditions include:

• Principal residence. The home must be the principal residence of each borrower, and of any Eligible Non-Borrowing Spouse, at closing (24 C.F.R. § 206.39).
• Property standards. HUD's lender guide says the home must meet FHA property standards and flood requirements. It may be a one- to four-unit home with one unit occupied by the borrower.
• Federal debt. The CFPB says the borrower cannot owe federal debt, such as federal income taxes or federal student loans, though reverse mortgage money may pay it off.
• Counseling. The borrower must complete counseling with a HUD-approved counselor before the loan.
• Financial review. The lender reviews whether the borrower can keep up with taxes, insurance and upkeep.

HUD says the amount available depends on several things: the age of the youngest borrower or eligible non-borrowing spouse, the current interest rate, and the lesser of the appraised value, the HECM FHA mortgage limit, or the sales price. HUD publishes the current limit. Whether a person qualifies, and for how much, is the lender's decision.

Myth 9: You Stop Worrying About the House After Closing

Closing ends the monthly loan payment, but it does not end the duties that come with owning the home. They continue for the life of the loan:

• property taxes
• homeowners insurance
• association dues and similar housing costs, where they apply
• keeping the home in good repair

These are not small print. If they go unpaid, the loan can be called due, and if it is not repaid, the lender may foreclose. Myth 5 sets out the rules that make this so.

For someone on a fixed income, the practical question is whether these bills will still be affordable in ten or fifteen years. The answer matters as much as the size of the loan.

The financial review and the set-aside described under Myth 5 exist because unpaid taxes and insurance have caused real trouble for some borrowers. HUD's program page states the condition directly: borrowers may stay "as long as property taxes and homeowner's insurance are kept current."

Myth 10: Once You Sign, You Cannot Change Your Mind

There are pauses built in, both before and after signing.

Before the loan, counseling is required. The borrower must have received counseling "by an independent third party that is not, either directly or indirectly, associated with or compensated by a party involved in" making or servicing the loan, funding it, or selling annuities, investments, insurance or other financial products (12 U.S.C. § 1715z-20(d)(2)(B)).

The counselor must discuss options other than a HECM, including "other housing, social service, health, and financial options" (12 U.S.C. § 1715z-20(f)(1)). The FTC adds that no one has to buy any other financial product to get a reverse mortgage.

Before closing, the borrower gets a statement. At least 10 days before closing, the lender must provide a statement explaining that the borrower's liability is limited and setting out the borrower's rights and obligations (12 U.S.C. § 1715z-20(e)(2)).

After closing, there is a right to cancel. The CFPB says that with most reverse mortgages, the borrower can cancel within three business days after closing, for any reason, without penalty. This is called the right of rescission.

Counseling first, a cost statement, and time to cancel: that sequence gives a family room to think.

What to Do After Reading This

A reverse mortgage is neither the miracle some ads suggest nor the trap some relatives fear. It is a loan with real costs, real protections and real obligations. Whether it fits depends on the household's own facts.

Several next steps are educational:

• HUD-approved counseling. It is required before any HECM, and it can be done while a family is still only considering one. HUD's program page lists a counselor roster, and HUD's line is (800) 569-4287.
• The CFPB's questions for a counselor. The CFPB's list of questions is useful to bring along. It includes how a reverse mortgage would affect a spouse and what other options exist.
• The FTC's consumer page. The FTC's page on reverse mortgages, linked under Myth 6, explains costs, non-recourse protection and sales pressure.
• Golden Roof Equity's explanations. Reading this site's plain-English pages on home equity options before a counseling session, or before speaking with a lender, can make those conversations easier to follow. One example is how a reverse mortgage is repaid.