Most people who are 62 or older have heard of reverse mortgages. Some have taken the time to learn about them and have a positive impression. Others, who have relied on secondhand information, read an article or simply know little about the loan remain skeptical.
In truth, reverse mortgages can be an excellent opportunity for someone 62 and older to be able to afford retirement, remain in their home or even plan for retirement with some certainty of cash flow.
The Federal Reverse Mortgage Program has been around for 28 years. It was created during the Reagan presidency, was passed by Congress and is administered by HUD.
A reverse mortgage allows someone 62 or older to gain access to the equity in his or her home. The amount of money that can be accessed is determined by the age of the borrower, the appraised value of the home and current interest rate. As long as one of the owners resides in the home, no payments are due.
The loan balance is determined by the homeowner and his or her needs. Homeowners may take monthly income, leave the funds in a line of credit until actually needed or use to pay off a mortgage or other debt.
If someone has a mortgage, it is required to be paid off. Paying off a mortgage frees up after-tax income to the homeowner. The size of the loan will only include the amount of funds that are actually used, plus a small mortgage insurance premium and interest that accrues.
A homeowner can make payments if they want, but payments are not required.
The cost of the reverse mortgage is one of the rumors that naysayers use to criticize them.
There is an origination fee similar to any mortgage. There is also a mortgage insurance premium that protects the homeowner and heirs from ever owing more than the home is worth. If the loan should grow to be greater than the value of the home, the mortgage insurance premium will pay the difference when the last person leaves or dies.
The homeowner and heirs are protected from owing anything on a reverse mortgage. And no other assets will be used to satisfy the loan.
Another myth is that the lender owns the home. Not so. The homeowner continues to own the home. He or she is responsible for paying taxes and insurance. If the homeowner dies and there is equity left, the heirs receive the remaining equity when the home is sold.
Why would someone consider a reverse mortgage?
• Funds used from a reverse mortgage are not subject to taxation, which means fewer funds are needed.
• Homeowners can avoid spending down existing assets. This can leave other assets for future income or for heirs.
• Equity in a home is illiquid, which means it is not accessible unless the home is sold or a home refinance is done, which increases risk since payments are required.
• Reverse mortgages can be used as a planning tool for future needs.
• With a reverse mortgage, unused funds remain in a line of credit. The balance in this line of credit grows making more funds available. The increased funds come from making more equity available to the homeowner over time.
The biggest challenge in retirement is the uncertainty of life expectancy and what may happen in the future. Most people who retire have a fixed income. However, many of their costs will be subject to increases. Taxes and insurance are just one example.
Chronic illness or death of a spouse is an important consideration. Seniors average 14 percent of their income going toward health care costs, and this does not include the most important step seniors can take is to examine their future plans and consider what increasing costs will be.
Seniors need to ask these questions:
• Are our investments and defined benefits stable or subject to volatility? In the case of defined benefits, are these benefits subject to reduction if the company or public entity can no longer pay the benefit?
• Are we exceeding the income we receive from Social Security, savings or investments? Do we see the amount we have set aside for the future decreasing? Are we using credit cards for expenses each month?
• Do we have a plan and savings for healthcare if one of us becomes ill?
• If one of us should die, how will the other manage?
• Do we plan to stay in our home long term? If we move closer to family, have we discussed this with them and can we afford the costs where they live?
• If you are in a second marriage, make sure you have discussed your plans if one of you should die. Both parties should consider joint ownership to avoid challenges to a will.
The answers to these questions may make someone uncomfortable. However, not recognizing and acting on any weaknesses in planning can have unfortunate consequences. It is easy to say, “It won’t happen to me or us”, but if it does, there may be few options to consider.
Joan E. Hillman has over 12 years’ experience as a reverse mortgage loan officer. She is licensed in South Carolina and Georgia. If you have questions, she can be reached at 912 226 7637 or Joan@franklin-funding.com.