Respect for and acceptance of reverse mortgages is growing by leaps and bounds.
New reverse mortgage rules give retirees reasons to jump for joy!
While, reverse mortgages once had many detractors, recent changes to the FHA reverse mortgage program have helped many people change their reverse mortgage reviews. More people are beginning to see just how useful these loans can be — both for seniors who need help making ends meet and those who use them as part of an overall retirement financial plan.
Reverse mortgages are a type of loan that enable borrowers to stay in their home, eliminate mortgage payments and tap into their home equity to use for monthly budget needs or as a tool for maximizing their lifetime wealth.
The new reverse mortgage program changes have been the subject of positive press in the mainstream media from outlets such as Forbes and The Wall Street Journal. Articles highlight the “new and improved” reverse mortgages.
- Forbes Magazine declares that, “Reverse mortgages can be a retiree’s saving grace.”
- The Nobel Prize-winning economist Robert C. Merton, a finance professor at MIT’s Sloan School of Management, recently stated in a Barron’s article, “Americans have wrongly steered clear of reverse mortgages.”
- The Wall Street Journal recently ran a headline saying, “Advisers now are promoting them as a valuable tool for retirement planning, thanks to recent safeguards.” The article stated that “The reverse mortgage has won some new respect.”
- Kiplinger’s recommends retirees look at reverse mortgages as one of 5 money moves as you ramp up to retirement.
- Money says, “These once-suspect loans can be a useful source of cash in retirement.”
- In an interview, columnist Jane Bryant Quinn says: “I am very positive about reverse mortgages, but I wasn’t always. I have taken a new view on them, partly as a result of the new regulations passed last year.”
And, a recent Ohio State study found that the vast majority of reverse mortgage borrowers have been “satisfied” or “very satisfied” with their decision to get the loan.
Would the loan be right for you? Try a reverse mortgage calculator to assess your loan amount or try a reverse mortgage suitability quiz.
Some of the most significant changes to reverse mortgages arrived with the passage of The Reverse Mortgage Stabilization Act of 2013, which the federal government signed into law in October 2013.
The law gave FHA the authority to make necessary changes to the HECM program, all with the intent to reduce risk and make reverse mortgages easier for seniors to use responsibly.
Before June of 2015, married couples would sometimes get a reverse mortgage but only put one partner on the loan. This might occur if one member of the couple was under 62 — too young to be a reverse mortgage borrower.
However, if only one spouse was listed as a reverse mortgage borrower, then the other spouse would have to repay the reverse mortgage loan if the borrower died or permanently moved to a nursing facility.
New rules now enable a non borrowing spouse to stay in the home as long as it is his or her primary residence — no matter what has happened to their partner.
One of the most significant rule changes limits the amount of loan proceeds borrowers may be eligible to access during the first year of their reverse mortgage.
In the past, many borrowers took out fixed rate reverse mortgages in the form of a lump sum. In some cases, borrowers used all of their loan proceeds and found themselves unable to pay their property taxes or homeowner’s insurance. This triggered the HECM to become due and payable, and as a result, some reverse mortgage borrowers lost their homes to foreclosure.
New HECM program guidelines make this situation a lot less likely to happen. Now, reverse mortgage borrowers may only take out a maximum of 60% of their principal limit during the first year of the loan. After the first 12 months, borrowers can then draw on their remaining loan proceeds. It is possible to access more than 60% of the principal limit during the first year, but this comes with an added cost.
For example, if the borrower takes less than 60% of the principal limit in the first year of the loan, the initial Mortgage Insurance Premium (MIP) they will need to pay (as is required on all HECM loans) is 0.5% of their home value, according to a recent Forbes article written by Wade Pfau, a financial planner and director of retirement research at McLean Asset Management in McLean, Virginia.
“For those staying under the 60% threshold, the initial mortgage insurance premium is $500 per $100,000 of home value, up to $3,128 for the $625,500 limit,” Pfau writes.
Borrowers may choose to access more than 60% of their principal limit during the first 12 months of borrowing, Pfau notes, however, they will be charged a greater MIP of 2.5%. The purpose of the mortgage insurance premium is to cover the guarantees provided by FHA to the lender and consumer.
“The protection ensures the consumer will have access to their full principal limit even if the lender goes out of business, and the lender is protected for the non-recourse aspect of the loan,” Pfau writes, meaning if the home value cannot cover the loan balance, the government will make up the difference for the lender.
Additional protections set forth by the Reverse Mortgage Act of 2013 also ensure that borrowers have the financial means to obtain a reverse mortgage.
The inability of borrowers to afford property taxes and homeowner’s insurance was a major problem for reverse mortgages before 2013. A new rule that finally passed in 2015 aimed to put an end to these problems of the past.
As of April 27, 2015, all reverse mortgage borrowers are required to go through a financial assessment prior to qualifying for the loan.
Similar to the credit underwriting standards of a regular mortgage, this financial assessment determines whether a reverse mortgage applicant has the financial means to not only qualify for a HECM, but to continue paying their mandatory obligations (e.g. property taxes, homeowner’s insurance, homeowner association fees, hazard and flood insurance).
Best of all, if it is determined that you might be at financial risk, safeguards can be put in place so that you will still qualify for the loan.
Do you qualify? The reverse mortgage calculator assesses your eligibility and estimates your loan amount.
Because these new rules promote a safer and more responsible use of reverse mortgages, more financial planners have begun to take a closer look at how HECMs can fit into the plans of their higher net worth clients. Financial advisors are having success using reverse mortgages as part of a retiree’s retirement income planning strategy, hence the attention from distinguished experts such as Pfau and others of his ilk.
Reverse mortgages were once considered to be a loan for people who were at the end of their financial rope. And while the loans do help seniors in need, they are now also a powerful financial tool for almost anyone. When used effectively, they can increase your overall wealth and security.
A few of the ways people now use reverse mortgages include:
- Helping to make ends meet by eliminating mortgage payments or accessing cash.
- Delaying the start of Social Security so that monthly income from this benefit is greater.
- Funding a lifelong dream like travel.
- Creating a lifetime income stream — reverse mortgage loans can be annuitized which may be better than buying a lifetime annuity.
- Deferring withdrawals from a 401k, IRA or pension plan — this is particularly powerful if your investments are down but you need money. The reverse mortgage can increase your flexibility with money management.
- Hedging the value of your home. If you think home values are at an all time high, securing a reverse mortgage is a way of locking in that value without selling your home.
If you would like to know more about how a reverse mortgage may fit into your retirement plans, or if you would simply like to get an idea of how much proceeds you may be eligible to receive, try using an online HECM calculator or contact a reverse mortgage consultant today.
