Many preconceived notions surround the term “reverse mortgage,” And, a lot of them are negative. In fact, it’s practically become taboo to broach the topic within the context of financial planning. But why is that?
Here’s what a reverse mortgage is and how it works. Simply put, a reverse mortgage allows borrowers to tap into their home’s equity (similar to a home equity loan) without having to make a monthly payment. To qualify, you must meet the following requirements:
- At least one borrower must be 62 years of age or older.
- The home must serve as your primary residence.
- You need the financial resources to cover taxes, insurance and maintenance for the house.
- You must participate in a consumer information session given by a Department of Housing and Urban Development (HUD)-approved Home Equity Conversion Mortgage (HECM) counselor.
This all seems practical and clear cut. So why are so many people hesitant to explore the reverse mortgage as a viable financial planning tool? Much of that apprehension stems from the first versions of the product.
An Unbecoming History
While it may seem like a rather new option, the first reverse mortgages were written back in the early 1960s. At that time, fixed-rate options weren’t available, there weren’t any restrictions on equity distributions and credit checks weren’t run. But for many, the primary negative issue with reverse mortgages was this: If your spouse didn’t meet the required lending age of 62 years at the time the loan was processed, he or (typically) she had to be removed from the house title. And that was a big deal because the loan was due, in full, once the borrowing spouse died. If the surviving spouse didn’t have the means to satisfy the loan, he or she was forced to vacate the home, which would then be placed in foreclosure. You can see why reverse mortgages earned their tarnished reputation! Added to this less than ideal situation were numerous misconceptions surrounding the product.
A Tool of Last Resort—No More!
Fortunately, reverse mortgages have evolved with the times. Once viewed as a “loan of last resort,” the reverse mortgages of today bear little resemblance to those of the ‘60s. Today, limits are in place to curtail excessive spending. HUD-approved counseling is required and credit checks (to a limited scope) are run to help prevent foreclosures. Also, fixed-rate options are now available (for the lump sum option). Costs have been re-structured in this manner:
- Origination fees are capped at $6000.
- Mortgage insurance premiums are limited to 2 percent of the appraised home value.
- On-going premiums are set at 0.5 percent of the loan balance, which can be rolled into the loan.
- Lump sum. (Only up to 60 percent can be taken in the first 12 months.)
- Annuity payouts.
- A non-callable line of credit.
Participating borrowers are using reverse mortgages in multifaceted ways. The reverse mortgage will eliminate your existing mortgage, freeing up income for you to use for other needs or desires. For example, you can use this income to delay receiving Social Security payments until you are eligible to receive your maximum benefit. You can also draw from the line of credit in times when market returns are down so you won’t have to deplete your retirement assets too quickly. Another potential option: Use the income stream for long-term care premiums.
Is a Reverse Mortgage for You?
The stigma surrounding reverse mortgages is slowly being eradicated, and the new-and-improved product is finding its way into more financial plans. It is important to work with a Federal Housing Administration (FHA)-approved lender when implementing a reverse mortgage.
If this is something you would like to explore, contact us. We can determine if a reverse mortgage is a viable strategy in your comprehensive financial plan.