The New Reverse Mortgage
What if you really wanted to purchase a home in a retirement community, but the only equity you had available was locked up in your current home? For one couple, a reverse mortgage gave them the ability to live in their dream home in a community they had always admired but would otherwise not have been able to move to.
The New York Times article, “The quiet comeback of reverse mortgages,” reports that reverse mortgages, which allow homeowners age 62 and older to tap into their accumulated home equity without facing monthly payments in return, have received a bad rap over the years because of abuses by lenders.
The volume of reverse mortgages decreased to about 30,000 this year from about 115,000 at their highest point in 2009. However, with reforms, they’re making a slight comeback and are viewed as a way of helping some retirees fill in the gaps in their future income. A reverse mortgage can provide cash or “longevity insurance” when other sources of retirement income dwindle. They also can be a source for out-of-pocket health care costs or other sudden financial needs. Similar to a conventional mortgage, a reverse mortgage obligation is met when the house is sold by the owners, the last owner has died or the home is sold by heirs. Any equity left over is kept by the last homeowner.
Also known as “Home Equity Conversion Mortgages,” these loans are insured by the government. The Federal Housing Administration makes up any debt owed from the final loan balance and net proceeds from the sale. You don’t have to worry about being “underwater” on the loan in case the home’s value is less than the mortgaged amount.
Reverse mortgages can give retirees with only modest savings but little or no housing debt the ability to stay in their homes and can provide a financial safety net for those worried about outliving their retirement funds.
A reverse mortgage can eliminate the burden of conventional housing debt, monthly payments of interest and principal, and can assure heirs that they wouldn’t be required to make up any losses if the home sold for less than the value of its mortgage.
Stricter regulation from the FHA and the Consumer Financial Protection Bureau—like mandatory counseling prior to lending—and lower costs have helped increased their popularity among seniors. Some folks don’t have enough savings to get through retirement, so they may use all of their wealth—including home equity—as a retirement income source. Others use reverse mortgages to create a cash buffer in the event a dip in the stock market depletes their retirement portfolio. Rather than selling stocks and funds when the market is down, they can use their home equity through a reverse mortgage line of credit to provide an income stream. One other rationale for seniors looking at reverse mortgages is to finance the costs of long-term care.
It should be noted that a reverse mortgage is not for everyone. For instance, families who wish to leave their homes to their heirs, whether to live in or to sell, should not take out a reverse mortgage.
Some questions to ask include: how long do you plan on staying in your current home, how much equity do you have in your home, how will you use the cash and could a line of credit solve your need for cash? If you do decide to explore the use of a reverse mortgage, speak with an elder law or estate planning attorney to ensure that a reverse mortgage will not conflict with your existing estate plan. And like any other financial product, make sure to shop carefully and be wary of any financial institutions that are not top rated.
Reference: The New York Times (July 2, 2016) “The quiet comeback of reverse mortgages”