How Reverse Mortgages Work: Do You Agree With the Top 6 Reverse Mortgage Objections?
At NewRetirement we understand how hard it is to save enough cash for retirement. We hear awful stories of seniors suffering financially.
However, many of you have paid off or paid down your mortgages and actually have substantial savings in your home equity. If you are rich in home equity but cash poor, a reverse mortgage might give you the financial breathing room you need.
While a reverse mortgage is not right for everyone, sometimes the only thing holding us back from really looking at the product is a stronger understanding of how reverse mortgages work.
By addressing some of the top objections that we hear about Home Equity Conversion Mortgages (HECM) (also known as reverse mortgages), we hope to help our readers understand just how useful these loans can be. We invite you to do yourself a favor and approach this with an open mind, as some of these answers may surprise you! Here are the biggest reverse mortgage objections.
1. It’s Not Worth It to Sell My Home for 50% of Its Value
This is the most repeated objection we hear from retirees, most often from those who are closer to age 62.
A reverse mortgage does not cause you to sell your home. You are the only person on the title and you retain all ownership. A reverse mortgage is just a loan that allows you to access an advance on a portion of your home equity. This is the reason you and your spouse (if applicable) are able to continue living in the home indefinitely. You still “own” your home the same way you would with a traditional mortgage.
The amount of home equity you can access through a HECM generally starts at about 50% of your home’s value at the earliest age you are eligible for this type of product, which is age 62. As you get older, the percentage of the home’s value you qualify for increases.
In fact, the limited loan amount is actually good news for two reasons:
A. Borrowing only a portion of your home’s value leaves you with more flexibility in the future.
Although a reverse mortgage is designed to help retirees age in place, having a smaller balance allows you to exit the home earlier if that is what you need.
If you find that your life plan has suddenly changed, and you want to downsize or relocate, you can pay off your reverse mortgage and use the remaining proceeds from the sale of your home to accommodate that change in location.
B. When you get a reverse mortgage loan, you have three options for accessing your money: cash, monthly payments, or as a line of credit.
Establishing a HECM line of credit earlier rather than later allows you to grow your line of credit over time. It also allows you to lock in your home’s current value since the HECM benefit doesn’t drop if home prices go down. It’s a little known fact that a reverse mortgage line of credit grows year after year. Some think of it as a guaranteed annual limit raise on your credit card.
This line of credit is similar to a traditional Home Equity Line of Credit (HELOC) but there are some interesting differences. Once your reverse mortgage line of credit is established it cannot be revoked unless you default on the terms of your loan. What’s more, a reverse mortgage line of credit does not have income requirements as long as you can prove your creditworthiness by submitting to a lender’s financial assessment.
The line of credit grows every year because the unused portion of the credit line grows with your loan interest plus the mortgage insurance premium renewal. That means the longer you wait to tap your line of credit, the more credit you have to borrow against.
Once you lock in your appraised value for the purpose of a reverse mortgage, market value decreases do not affect what is available to you on your monthly payments or reverse mortgage line of credit going forward.
2. The Amount I Receive Is Too Low
Many consumers understand that borrowing from your own equity is not the same as selling your home, but they still may think the amount they qualify for is too little.
Keep in mind, when you convert your home equity to available cash, it is important for that money to last in retirement. You also want to continue to have a stake in your home value, which is represented by the equity reserves remaining in your home. As those equity reserves become depleted, the true ownership percentage in your home gets smaller over time.
The restrictions on HECMs were put in place by the government to nudge borrowers away from borrowing too much, too soon.
That said, if you establish a reverse mortgage line of credit now, it’s there as a security blanket, when you really need it. If you don’t need it for 10 years, your line of credit will grow substantially over that time, and could possibly be more than the market value of your home over time.
3. The Fees Are Too High
Many consumers argue that the fees involved with a reverse mortgage transaction are too high, while those of us who have taken advantage of lower interest rates to refinance our mortgage balances are less sensitive to the closing costs involved.
People who have looked at refinancing their home loans know that there are costs involved and they should consider the cost of refinancing versus the potential savings over time that a more favorable interest rate might bring.
Being that this loan is designed as a longer term way to access your home equity, you should realize that most of these closing fees are not “out of pocket” costs, but are deducted from the gross proceeds of your reverse mortgage loan.
Just like a traditional refinance, it’s also important to put reverse mortgage fees into perspective by amortizing them over the life of your loan. Most consumers who take out a reverse mortgage plan to stay in their home for at least 15 to 20 years.
When the closing costs are viewed long term, it should be considered a trade-off for not having to make a monthly mortgage payments going forward combined with the security and flexibility that come with having access to your home equity.
4. I Don’t Think I Need the Money
You may think you don’t need the extra money now, but when an unexpected financial crisis hits, accessing your home equity last minute with a reverse mortgage is not easily done. This type of loan can take upwards of 45-90 days to fund. Having a reverse mortgage line of credit available can be smart for several reasons:
- It’s there if you need it, and the bank cannot pull the line of credit if your finances change.
- It grows over time, so the amount of equity you can access becomes larger year over year.
- When the market isn’t performing, you can draw from your equity instead of liquidating investments. When the market is doing well, pay your line of credit back if you want to keep the balance low.
A reverse mortgage line of credit is utilized by planners who like to have a backup strategy. It’s not a matter of needing the money now, but it can be used to avoid being up against a wall when the need arises.
5. I Want My Kids to Inherit My House
Not all parents are generous enough to want to leave a financial legacy to their children. Unfortunately that financial legacy comes at the price of you passing away.
How nice would it be to help your children or grandchildren while you are still alive? If your children or grandchildren need financial assistance now, you can draw down a portion of your home equity to do that. And you get to see the benefit it provides them.
Finally, if you get a HECM and don’t use up your home equity, then any remaining equity is available for your heirs.
6. Everyone Says It’s a Terrible Idea
It is most often those who misunderstand the product or don’t know the facts about reverse mortgages, who say it’s a terrible idea. The fact of the matter is that reverse mortgages are not for everyone, but they help many seniors live better while remaining self-sufficient.
Reverse mortgages are not a good idea for someone who plans on relocating within a few years or needs to go into assisted living. It’s also probably a bad idea for a person who isn’t responsible with their savings.
Ask the person who was able to retire at 65 instead of 70 how much of a terrible idea it was! It’s time to really enjoy your golden years. According to scholars at the Ohio State University, “Reverse mortgage borrowers have significantly higher financial and housing satisfaction compared to nonborrowers.”
If finances are holding you back from truly loving retirement, and you have a nest egg in your equity, you deserve better. A better retirement is within reach!
The best way to keep your options open and truly evaluate this strategy is to start with one or several free written proposals from a credible lender. A written proposal will answer all your questions about interest rates, closing costs, monthly drawdown amounts, and even provide an amortization schedule so you can see how your line of credit and the accumulated balance grows over time.