“Suze Orman says that a reverse mortgage can indeed be a viable way to generate income.
However, it’s essential to understand that after you take out a reverse mortgage, you will still be responsible
for paying maintenance costs, property taxes, and homeowners’ insurance premiums.”- Larry Speir
By Larry Speir
A type of home loan that lets a homeowner who is at least 62 convert part of the equity in their house into cash, a reverse mortgage is an often-misunderstood yet potentially powerful method of turbocharging your retirement years.
In the regular mortgages to which most of us are accustomed, a borrower makes a monthly payment to pay down a loan. When you have a reverse mortgage, the lender pays the borrower a specific portion of their home’s value. That debt increases with time, and the loan doesn’t settle until the borrower moves out, sells the house, or passes away. When one of those events occurs, the loan must be repaid.
A Maine-based savings and loan institution created the first modern reverse mortgage in 1961. The company did so to help one of their widowed clients avoid losing her home. Since that time, reverse mortgages have undergone many innovations and improvements. Most are now insured by the Federal Housing Administration’s- (FHA) Home Equity Conversion Mortgage (HECM) program.
Seniors are increasingly open-minded to the idea of reverse mortgages due to the FHAs oversight, along with improvements to the product itself. Although reverse mortgages currently account for less than 2% of the multi-trillion-dollar US mortgage industry, growing numbers of seniors are starting to see accessing home equity to finance retirement goals that would otherwise be difficult or impossible to achieve.
Previously dogged by controversy and replete with cautionary tales, the reverse mortgage industry now makes concerted efforts to rid itself of the “bad seeds” within its ranks. The 21st Century iteration of the reverse mortgage industry places greater focus on self-regulation and improved consumer relations, promoting itself with endorsements from credible spokespersons such as actor Tom Selleck. The results have paid off, and business is booming for many companies specializing in reverse mortgages. Also, according to the Department of Health and Human Services, the number of people eligible to apply for a reverse mortgage (homeowners age 62 and older) will nearly double by 2060. I expect that trend to continue, especially as harsh economic conditions force many American seniors to seek alternative income sources.
Who’s a good candidate for a reverse mortgage?
As I mentioned, there is an age requirement. You must be at least 62 to take out a reverse mortgage in most states, although your reverse mortgage expert may describe exceptions to that rule. Beyond that, a prospect for a reverse mortgage is typically someone who believes that they haven’t saved enough money to retire comfortably. They could be someone who has experienced some medical or personal crisis that has depleted their savings. Or, they may be an older American who wants to help a loved one who wants to buy a home, pay for college, or start a business.
More specific personal requirements for starting a reverse mortgage include:
You need to own the home outright or have at least 50% equity. In many cases, even if you still owe money on your home and have an existing regular mortgage, you may qualify. Refinancing existing debts using a reverse mortgage could help improve your cash flow. In such instances, funds from the reverse will pay off the existing mortgage and other obligations, increasing your monthly income levels.
You are obligated to live in the home as your primary residence. You will need to have the home as your primary residence during the entire time you have the reverse mortgage. A rental property or vacation home will not qualify.
You must agree to HUD-approved counseling before you apply. Deciding on a reverse mortgage is not something you want to do under duress or whim. For this reason, the US Department of Housing and Urban Development, or HUD requires you to get counseling with an approved reverse mortgage counselor before applying. During this session, your counselor’s goal is to ensure you fully understand the process, terms, and implications of your reverse mortgage.
When is a reverse mortgage NOT the correct option?
Some people can alleviate the strain on their monthly budgets via a reverse mortgage, especially seniors living on fixed incomes. For those folks, a reverse mortgage can augment Social Security payments and help offset unexpected medical expenses not covered by Medicare.
However, if not designed by an expert and used carefully, a reverse mortgage could potentially imperil a senior’s retirement plans. For instance, if your main reason for taking out such as loan is to help you delay taking Social Security payments too soon, the cost of the reverse mortgage may wind up being more than any Social Security benefits you gain. You need to consult with someone who specializes in these vehicles and can do the math necessary to help you make a wise choice.
A reverse mortgage may also be a less than desirable option for those with enough income or who can sell their homes and use the equity to help through temporary financial setbacks. Another reason to avoid a reverse mortgage is if you and your loved ones want to keep the home in the family. Although heirs can still inherit a house with a reverse mortgage, they’ll need to pay off that mortgage. The reverse mortgage debt has been going up instead of down and could be more than your heir can manage. It would help to discuss your plans with your heirs and a mortgage expert to get their input before committing to a reverse mortgage.
Finally, if you live in an area where property taxes and homeowners’ insurance are on the rise, you may want to re-think a reverse mortgage. Remember, you are on the hook for those costs, no matter how much they increase.
Due to unexpected circumstances, you could lose your home if you fall behind in maintenance or other obligations.
The Takeaway: Reverse mortgages are not “do-it-yourself” quick fix loans to get you through a temporary financial setback. Instead, they are intended to be part of a thoughtfully executed strategy for retirees with specific needs and goals. If you’re thinking about a reverse mortgage loan, there are many factors to consider. Always seek the counsel of your retirement income planner or reverse mortgage specialist before signing on the dotted line. Stay tuned to this website for more drill-downs into reverse mortgages, and know that my staff and I are always available to give you unbiased, truthful answers to all your questions.
Larry Speir NMLS 2078566 https://jetdirectmortgage.com/larry/