The Reverse Mortgage Quiz: Test Your Knowledge

When I talk with consumers and financial advisers about retirement income planning, 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.

Very few retirees or their financial advisers, however, know much about how to properly utilize home equity in retirement planning. Since most retired homeowners want to live in their houses for as long as possible, tapping into home equity must be done thoughtfully and through a well-informed, comprehensive retirement planning process.

When used effectively, a reverse mortgage can allow a homeowner to live a more financially secure retirement. Take this quiz to test your knowledge on reverse mortgages.

Written by Jamie Hopkins, a professor at The American College and Director of the New York Life Center for Retirement Income. Hopkins is a well-recognized writer, speaker and thought leader in the area of retirement income planning. His most recent book, “Rewirement: Rewiring The Way You Think About Retirement,” details the behavioral finance issues that hold people back from a more financially secure retirement.

1: The earliest age at which a person who is the sole owner of a home can enter into a reverse mortgage is 55.

  1. True
  2. False

The correct answer is B. False

A borrower must be 62 or older to enter into a reverse mortgage. If you have two spouses who both want to be considered borrowers on the loan, they both need to be at least age 62. However, there are instances of couples getting reverse mortgages where one spouse is over age 62 and the other one under 62. In those cases, the spouse under age 62 is considered a “non-borrowing spouse.” We’ll have more on the implications of that situation in another question in a bit.

2: One downside of entering into a reverse mortgage is that the bank takes title and ownership of the home.

  1. True
  2. False

The correct answer is B. False

The borrower(s) by law must have and maintain title and ownership of the home to enter into a reverse mortgage. Basically, you still own the home, but you are borrowing money and using the home as security for the loan. You don’t have to pay the money back until you move out, sell the house, or die.

3: A reverse mortgage can be used to purchase a home.

  1. True
  2. False

The correct answer is A. True

The government, through the Federal Housing Authority (FHA) and Housing and Urban Development (HUD), has created a program that allows Americans to purchase a home through the use of a reverse mortgage program called HECM for purchase. HECM is the Home Equity Conversion Mortgage program, and it is regulated by the federal government. The HECM for purchase program must be used for the purchase of your principle residence.

4: 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.

  1. True
  2. False

The correct answer is B. False

Neither establishing a reverse mortgage nor receiving amounts from the bank will have any immediate income tax consequences, because a reverse mortgage is a form of borrowing.

5: 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.

  1. True
  2. False

The correct answer is A. True

That is one of the main reasons people choose to utilize a reverse mortgage, so they can quit making monthly payments and use that money for other things in retirement instead. According to HUD: “A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you. However, unlike a traditional home equity loan or second mortgage, HECM (Home Equity Conversion Mortgage) borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage.”

6: Once you enter into a reverse mortgage, you no longer have to pay property taxes or insurance costs.

  1. True
  2. False

The correct answer is B. False

With all mortgages (traditional and reverse), tax and insurance payments are the responsibility of the homeowner. To be eligible for an FHA HECM, the FHA requires that you have the financial resources to pay ongoing property charges, including taxes and insurance. And borrowers must be able to maintain their property as well. If they can’t keep up with these costs, their loan could go into default, potentially forcing a sale or foreclosure. In some instances, the lender will set aside a part of the HECM loan in order to cover ongoing property taxes and insurance fees.

7: If a borrower takes out a reverse mortgage and the home later goes underwater (the home 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.

  1. True
  2. False

The correct answer is B. False

A reverse mortgage is a non-recourse loan, meaning that you do not owe anything more to the lender than the value of the home at the end of the loan if the house is underwater. The loan documents specifically state that “no deficiency judgement may be taken against the borrower or his estate.” Additionally, the lender does not get to keep more than the outstanding loan value. When the home is no longer used as a primary residence for the borrower(s), the cash the homeowner received over the years, the interest, and other HECM finance charges must be repaid, but only up to the value of the home. All proceeds of a sale of the home, beyond the amount owed to the lender, belong to the borrower or their estate. This means any remaining equity can be transferred to heirs.

8: Research has shown that 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.

  1. True
  2. False

The correct answer is A. True

Dr. Wade Pfau’s research in the Journal of Financial Planning showed that “there is great value for [Americans] to open a reverse mortgage line of credit at the earliest possible age.” Why? Because tapping a line of credit could give you the money you need for your expenses without having to take distributions from your investment portfolio. That would allow your investments to grow during times when markets are rising and avoid locking in losses when they fall.

9: When it comes to costs, borrowers should know that reverse mortgages have compounding interest on the loan balance and ongoing mortgage insurance premiums.

  1. True
  2. False

The correct answer is A. True

A big downside of using a reverse mortgage is that it is still borrowing. There are generally two types of charges. First, you have upfront closing costs with a reverse mortgage, which include lender fees and a large upfront mortgage insurance payment. Over time, interest and mortgage insurance charges accrue based on the current loan balance. As such, the amount you pay in interest compounds over the years, which can be very costly to the borrower. One option to mitigate the impact of compounding interest is for the borrower to make voluntary monthly interest payments on the loan. When compound interest is working for you when investing, it’s great. But when it’s working against you, it’s expensive.

For more, see “What are the costs I will have to pay for a reverse mortgage?” written by the Consumer Financial Protection Bureau.

10: 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.

  1. True
  2. False

The correct answer is B. False

Some protections were added to “eligible non-borrowing spouses” in 2014 that allow a non-borrowing spouse to remain in the home after the borrower died without having to repay the loan at that time. However, 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.

Additionally, non-borrowing spouses cannot borrow from the loan at any point. So, if the borrowing spouse passes away, the non-borrowing spouse will not be able to take additional withdrawals from the existing reverse mortgage.

This article provided by NewsEdge.