How Reverse Mortgages Work: Do You Agree With the Top 6 Reverse Mortgage Objections?
At NewRetirement we understand that it is almost impossible 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. You are just not interested in using it even though this home equity might give you the financial breathing room you desperately need.
While a reverse mortgage is not right all the time, 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) aka Reverse Mortgages, we hope to help our readers understand just how powerful 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!
Objection No. 1 – It’s not worth it to sell my home for 50%
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, age 62. As you get older, the percentage you qualify for increases.
And, the limited loan amount is actually good news:
- 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.
- 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. And, a reverse mortgage line of credit does not have income requirements as long as you can prove your creditworthiness with a lender financial assessment.
The reason the line of credit grows is because you are getting older, and your home is theoretically appreciating in value every year.
This allows you to access more of your home value over time, which means more cash available every year, after your reverse mortgage line of credit is established, even if home values go the wrong direction! 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.
Objection No. 2 – The amount I receive is too low
This objection relates to the first point. 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, and for you to also 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.
Another thing to consider, is that many consumers say they don’t need a reverse mortgage now, then a financial crisis hits, and suddenly they are looking for immediate ways to access their home equity. These loans can take time, sometimes 45-90 days.
There is also the risk that your home value decreases and/or interest rates rise which would make it harder to qualify. That being 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.
Objection No. 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 part of the annual trade off for not having to make a monthly mortgage payment going forward and the security and flexibility that come with having access to your home equity.
Objection No. 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 used to avoid being up against a wall when the need arises!
Objection No. 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? You can draw down a portion of your home equity and make things easier for loved ones or family members during your lifetime, while you are still around to witness 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. The HECM program is designed so that in general there should be some remaining home equity.
Objection No. 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 a more robust lifestyle while remaining self-sufficient.
It may be a terrible idea for someone who plans on relocating within a few years or needs to go into assisted living. It’s 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. Eighty three percent of people have gotten a reverse mortgage report being satisfied or very satisfied with their decision.
If finances are holding you back from truly loving retirement, and you have a nest egg in your equity, you deserve better, and a better retirement is within your 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 accumulated balance grows over time!