Reverse Mortgages: No Longer a Loan of Last Resort

MONEY TALKS – When most of us hear the term “reverse mortgage” there is usually a negative connotation associated with the phrase. It’s hard to pinpoint why these two words leave such a sour taste in our mouths when you consider that most of us don’t even know anyone with a reverse mortgage. Furthermore, when pressed on the issue of why reverse mortgages are bad, the standard response is usually; “Ummm, I don’t know. I just heard they were bad because they take advantage of senior citizens.” Perhaps you are subconsciously hearing Henry Winkler’s smooth cadence from the reverse mortgage TV commercial while thinking of a poor widow from Nebraska who just lost her family home. The truth of the matter is, due to some recent legislative changes to protect the consumer, a reverse mortgage is no longer a loan of last resort. If fact, in the right circumstance, it can be used as a very effective financial planning tool to preserve your wealth.

What is a Reverse Mortgage? – A reverse mortgage is home loan that allows you to own your home without having to make monthly mortgage payments. Instead of making monthly payments, like you would with a traditional mortgage, the loan balance on a reverse mortgage is paid in one lump sum when the borrower moves out, sells the home, or passes away. One popular myth circulating among the public is that the bank can kick you out of your home if the mortgage balance exceeds the value of the home. This is simply not true. As long you live in the home, keep it insured, pay taxes, and maintain the property, the bank can never force you to move out or sell the home. Another common misconception is that your family could get stuck with a big mortgage debt. When the borrower passes away, your family has two options. They can either purchase the home, for 95% of the appraised value or the mortgage balance (whichever is lower), or sell the home. If they choose to sell the home and the home value exceeds the mortgage balance, they can keep any remaining equity. Conversely, if the mortgage debt exceeds the value of the home they can walk away without owing a nickel. Since the loan is guaranteed by the Federal Housing Authority (FHA) Mortgage Insurance Fund your family can never be liable for any amount over the value of the home.

Why Should You Consider a Reverse Mortgage? – The use of home equity in a retirement-income plan is becoming a more popular tool used by financial advisors today because of the flexibility and protection it affords their clients. For many Americans, their home is their largest asset, yet under a traditional model the accessibility to this asset is nonexistent. Integrating a reverse mortgage into a financial plan may allow clients to tap into their biggest asset that otherwise has been hiding under their nose. In fact, Wade Pfau, Professor of Retirement Income at the American College of Financial Services, states; “the reverse-mortgage option should be viewed as a method for responsible retirees to create liquidity from an otherwise illiquid asset, which in turn can create new options that potentially support a more efficient retirement income strategy.” Integrating a reverse mortgage into a retirement plan can be a great option for seniors who want accessibility to the equity in their home and the comfort of knowing they can age in place.

Are You Eligible? – In order to be eligible for a reverse mortgage the borrower(s) must be competent, at least 62 years of age, and have equity in the home. They must have the financial resources to cover taxes, insurance, and maintenance costs. Federal debt cannot exist and any existing mortgages on the property must be paid off (which can be done with the loan proceeds). Lastly, a receipt of a counseling certificate from an FHA approved counselor must be provided. In order for the property to be eligible it must serve as your primary residence, meet FHA property standards and flood requirements, pass an FHA appraisal, and be maintained to meet FHA health and safety standards.

What Now? – Thanks to the Reverse Mortgage Stabilization Act of 2013, many safeguards were put in place to protect borrowers from taking on too much debt. However, as with any other loan, there are risks involved. “Unquestionably there can be misuses of the product. But the problem is the use, not the product” says Harold Evensky, Professor of Personal Financial Planning at Texas Tech University. Understanding the complexities of the loan and how to best integrate it into your financial plan are critical to success. Speaking with a CERTIFIED FINANCIAL PLANNER™ and/or FHA approved counselor would be a good start to finding out if you could benefit from a reverse mortgage.