So you think you know all there is to know about reverse mortgages? So did we, until we took this reverse mortgage quiz that we found in a just-published article from the highly respected financial website Kiplinger. This quiz was written by well-known retirement writer Jamie Hopkins, Professor of Retirement Income Planning at the American College of Financial Services. The ten-question quiz takes just a few minutes – but it might open your eyes to some of the misperceptions you’re still harboring about the reverse mortgage.
(And in case you hate quizzes, read on. We’ll offer a glimpse at the answers below.)
“A Big Piece of the Puzzle”
“When I talk with consumers and financial advisers about retirement income planning,” Hopkins writes, “the value of home equity is one big piece of the puzzle that is often overlooked. The reality is that home equity is America’s largest retirement asset. For most retirees, it can be nearly twice as much as their investment savings.” Hopkins goes on to say that, even with all the publicity about reverse mortgages, “very few retirees or their financial advisers…know much about how to properly utilize home equity in retirement planning.” This lack of knowledge can be especially crippling to retirees who want to stay in their own homes as they age, perhaps not realizing that the funds to allow that dream to become reality may be sitting right there – untouched – at their fingertips.
“Tapping into home equity must be done thoughtfully and through a well-informed, comprehensive retirement planning process,” Hopkins emphasizes in the Kiplinger article. “When used effectively, a reverse mortgage can allow a homeowner to live a more financially secure retirement.” So with that as a backdrop, let’s run through these ten questions. Test yourself and see how you do – and for more complete information about each question we suggest you click on the link above and take the quiz for yourself.
Are These Statements True or False?
All these questions are either true or false. Here’s question number one. The earliest age at which a person who is the sole owner of a home can enter into a reverse mortgage is 55. This is false: 62 is the minimum age, and if you’re married that minimum generally applies to both spouses. The spouse younger than 62 will typically be shown as the “non-borrowing spouse.”
Question number two: One downside of entering into a reverse mortgage is that the bank takes title and ownership of the home. This widely-believed, often-repeated statement is actually false. You as homeowner still own your home and you keep the title.
Question number three: A reverse mortgage can be used to purchase a home. This is true, under federal guidelines. Remember that the qualifying home must be your primary residence.
Question number four: If the value of your home has increased since you bought it, entering into a reverse mortgage would result in a taxable gain to the homeowner. This is false. Because a reverse mortgage is a form of borrowing, says Hopkins, there are generally no tax implications.
Question five: A reverse mortgage can be used to refinance or to pay off an existing mortgage, and the borrower is not required to make monthly mortgage payments as long as he or she is still using the home as the principal residence. This is absolutely true and is typically seen as the biggest benefit of the reverse mortgage program.
Question six: Once you enter into a reverse mortgage, you no longer have to pay property taxes or insurance costs. This is definitely false, and this belief can be a source of major problems if misunderstood. Taxes and insurance remain your responsibility as homeowner.
Question seven is another frequent source of misunderstanding. If a borrower takes out a reverse mortgage and the home later is worth less than the amount owed to the lender, the homeowner, estate or heirs would need to pay off the additional debt to the bank at the end of the loan. This is false: you and your heirs are protected against a drop in home value, which is a major safeguard built into a reverse mortgage. A qualified professional can explain the implications of this benefit in your particular situation.
Question eight: Reverse mortgages are often more beneficial when set up and used strategically early in retirement, as opposed to being used near the end of retirement as a last resort. This is certainly true, especially when using a reverse mortgage line of credit which grows over time.
Question nine: When it comes to costs, borrowers should know that reverse mortgages have compounding interest on the loan balance and ongoing mortgage insurance premiums. This is true. “A big downside of using a reverse mortgage is that it is still borrowing,” Hopkins writes. There are ways to mitigate some of the costs and interest charges, so getting solid, objective advice is essential. A reverse mortgage is definitely not for everyone.
Question ten is a hypothetical. If only one spouse is a borrower on the reverse mortgage loan, and the other spouse is a non-borrowing spouse, the non-borrowing spouse can continue to live in the home without repaying the loan if the borrowing spouse moves into a nursing home. It turns out that while there may be exceptions, this statement is false. Hopkins explains that a change in the law in 2014 extended protections for eligible non-borrowing spouses to allow them to remain in the home after the borrower died. “However,” Hopkins cautions, “the same protection is not afforded if the borrowing spouse happens to move out of the home and into a nursing home. In that instance, the loan would become due in full.”
Professional Advice Recommended!
A quiz like this can be a real eye-opener. Because there’s so much misinformation out there, for reverse mortgage advice we urge you to sit down with a trusted expert such as Ted Butler, one of the pros we wholeheartedly recommend. But now let us switch gears a bit to offer you one more retirement-related quiz from AgingOptions, a quiz with just two questions. First, “In planning for retirement, is it important to have a solid financial plan, a strong legal plan, a well-crafted medical plan, a carefully considered housing plan, and a clear and comprehensive family communication plan?” The answer is, “Absolutely.” Second question: “Is it essential that they all work together in an integrated way, not as separate, disconnected parts?” As you might guess, the correct response is, “Definitely.” That in a nutshell is why you need a LifePlan from AgingOptions – the only retirement plan we know of that weaves all these critical elements of retirement together. There’s nothing like it.
Please accept our invitation to find out more by joining Rajiv Nagaich at an AgingOptions LifePlanning Seminar very soon. See for yourself – without cost or obligation. For all the details and convenient online registration, visit our Live Events page, or give us a call. And no pop quizzes, we promise. Age on!
(originally reported at www.kiplinger.com)
Graphic courtesy of American Advisors Group (www.aag.com)