A reverse mortgage, while a controversial loan product, can be a great financial tool for retiring seniors and homeowners.
For many seniors who might benefit and qualify for a reverse mortgage, the loan program remains a mystery. Their understanding might only come from a rumor, an infomercial, or from knowledge of old programs that existed during the sub-prime lending era.
Not understanding the benefits of today’s safe and secure government backed reverse mortgages might be keeping many who might benefit from a good thing.
Reverse Mortgages: Gaining Popularity
According to data from the US Census Bureau, only 2-3% of Americans currently hold reverse mortgages. But, data suggests that reverse mortgages will likely gain more popularity in the coming years because of several factors converging at once. The FHA insured Home Equity Conversion Mortgage (HECM) is expected to have a bright future as more seniors chose to age in place in America.
Just over ten years ago, HECM reverse mortgages were originated at a pace of 5,000 – 10,000 per year; but, over that past decade, average reverse mortgages have been originated at a pace of over 70,000 per year. Why the big change?
First, the American population is growing older. Per the 2010 census record, there were already over 40 million Americans aged 65 and above. Experts project that in just three decades, the number of seniors in the country will double.
Furthermore, data in life expectancy is showing that Americans are also living longer, which supports the first projection.
Then there is the issue of rising costs of living, especially in health care and long-term care.
These concerns are putting a strain to the financial decisions that seniors must consider when they reach retirement years.
What’s an American senior to do if they have no satisfactory way of earning passive income during retirement, or if they have not saved enough retirement savings, or those whose only form of retirement income will be a meager pension or social security?
For many entering retirement, the benefits of homeownership and building equity over the years is the answer to the financially secure living they deserve. A great option that every senior should consider when looking at their retirement picture is a reverse mortgage.
So, what exactly is a reverse mortgage?
Simply put, a reverse mortgage is home loan product designed for seniors, 62 and older, that allows the borrower to buy or continue to own their existing home forever without the need of making any mortgage payments.
Seniors can convert equity they have built up into a new scenario that extinguishes all future mortgage payments, creating instant cash-flow in the amount of their current mortgage payment. Additionally, seniors who want to create an emergency line of credit, or use equity to pay off other existing debts, or even create an income stream from their equity have options to set up their finances the way they want.
Each senior’s situation at retirement is completely unique, and the reverse mortgage product has a variety of options that can provide benefit to a wide variety of needs.
In the future, the reverse mortgage becomes due once the owner decides to sell their home, refinance back to a forward mortgage, or if they pass away. If the homeowner passes and there is equity in the property, the heirs have rights to that equity. If the homeowner lives many years without making a mortgage payment and passes with no equity or up-side-down, then there is no money or loss to be paid back since the loan is FHA insured.
The reverse mortgage is a flexible financial tool that allows many American seniors to get the liquidity they need to supplement their retirement income.
Key features include:
- No monthly mortgage payments ever again
- Keep and live in your home for as long as you want (even if you owe more than your home is worth)
- Borrow against your home’s equity and take a lump sum, line of credit, income stream or a combination of these options
- Use proceeds of the loan however you want (i.e. ease your cash-flow, pay off debts, pay for medical bills, home improvement, etc.)
- Borrowers can pay taxes and insurance on their own or set up a LESA to set aside taxes and insurance to be paid by the reverse lender.
When is a reverse mortgage a good idea?
While reverse mortgages have often been stigmatized because of old original private or sub-prime programs, or from the old hefty costs—today’s HECM reverse mortgage is a secure government backed loan program created and administered with the goal of protecting our seniors at the times of their lives when it is needed most.
HECM loans do have mortgage insurance, but the annual cost of MI has most recently dropped by 60%, making the program much less expensive, and with all the benefits still available to our seniors.
Remember, a third-party, disinterested, HECM counselor approved by HUD will be able to answer your questions up-front before you even start an application to be sure the program fits your needs.
Every person’s situation is unique when entering retirement.
Here are some conditions or situations wherein a reverse mortgage can be worth exploring:
- You plan to retire in your own home and don’t want to move
- You can afford the home’s upkeep cost, but not the current monthly mortgage payments
- The proceeds of the loan can help you resolve other financial problems you might have
- You don’t want to leave a financial burden to your heirs
- You would like to leave remaining equity to your heirs
The decision to get a reverse mortgage requires an honest assessment of your finances and your future. One challenge is that knowing what to expect for the future and planning for the unknown is not easy. A reverse mortgage, which can sometimes feel confusing, should be explored and understood by every senior seeking to know all their options.Click to See the Latest Mortgage Rates»