You probably want reverse mortgages explained in a clear straightforward way. The loans can seem incredibly confusing and many retirees have had slightly negative views about them.
However, popular opinion is swinging and reverse mortgages may turn out to be the red wine of financial products — something once considered bad that is now thought to be very beneficial.
Not too long ago, people thought that drinking wine was an unhealthy habit. Research now shows that red wine, consumed in moderation, can have huge health benefits for many — though not all — people.
A reverse mortgage might be your key to toasting a secure and happy retirement…
Reverse mortgages are similar. They were once considered to be a bad deal for borrowers, but recent updates to regulations have made reverse mortgages a really compelling way to help retirees pay for retirement and safeguard retirement assets.
A reverse mortgage is a loan that lets the borrower access home equity to spend in any way they want. While it is a loan, there are no monthly payments, so it can dramatically improve your cash flow. It can also be a powerful financial planning tool, giving you more options for managing your overall wealth.
However, many misconceptions remain about the loan.
Here reverse mortgages are explained by addressing some of the common concerns about the loans:
A few years ago the regulations and qualifications for reverse mortgages were less strict and some seniors who had gotten these loans were evicted from their homes. However, the Federal Housing Administration enacted new guidelines in 2015 that made reverse mortgages safer for everyone.
Reverse mortgages are probably a bad choice for someone who plans on relocating within a few years or needs to go into assisted living. They are probably not the best solution for a person who isn’t responsible with their savings.
However, the vast majority of reverse mortgage borrowers are really happy that they got the loans. Eighty three percent of people have gotten a reverse mortgage report being satisfied or very satisfied with their decision. And, the products are being embraced by senior advocates and the financial planning industry.
A common misunderstanding about reverse mortgages is thinking that you are selling your home or a portion of your home. 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.
With a reverse mortgage, you own your home in the same way you own your home when you have a traditional forward mortgage or a home equity line of credit. However, with a reverse mortgage, there are no monthly payments and you are able to continue living in the home indefinitely.
The amount of home equity you can access through a reverse mortgage generally starts at about 50% of the value of your home at the earliest age you are eligible for this product — 62. As you get older, the percentage you qualify for increases.
Your loan amount is determined by a variety of factors including: your age, spouse’s age (if applicable), interest rates and the appraised value of your home (or the FHA lending limit of $765,600 — whichever is less).
There are several reasons why loan amounts are what they are, including:
- Flexibility: 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, you probably want to keep some of your home equity in reserve. These reserves give you some flexibility in the future and enable options to downsize, relocate or potentially leave an estate to heirs.
2. Hedge: The unborrowed home equity is also a hedge to insure that you will be able to pay the loan back. When you got a traditional mortgage, the amount of interest you would pay was determined at the outset of the loan and you started making payments immediately.
When you get a reverse mortgage, you don’t know the term of the loan and you are not making payments against the loan — you are instead accumulating interest. Therefore, the loan amount grows and you will owe more when the loan becomes due than you did when you first borrowed money — though you will never owe more than the value of your home when the loan is due. The loan is usually paid back with the sale of the home.
Reverse Mortgages Explained: Isn’t it Best to Wait to Get the Loan?
Perhaps the best time to get a reverse mortgage is when you are really old, house values are at their highest and interest rates are at their lowest — but apart from your age, those factors are almost impossible to predict.
If you need access to money now, then now is probably the best time to get the loan.
However, even if you don’t need money right away, you still might want to consider setting up the loan now in order to give yourself the most flexibility and opportunity.
- 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 now 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.
You can think of a reverse mortgage line of credit as similar to a traditional home equity line of credit (HELOC). Except, there are no income requirements to qualify for the reverse mortgage and you do not make payments on your reverse mortgage line of credit.
All loans have fees associated with them but reverse mortgage fees are marginally higher than those paid on a traditional forward mortgage or refinancing.
However, one could argue that the benefits of a reverse mortgage are much greater than the benefits of a traditional loan that needs to be paid back immediately.
The fees would be unjustifiably high if the loan is a short term solution. However, you are probably planning to stay in their home for at least 10, 15 or 20 years and these fees are built into the cost of the loan, not paid out of pocket.
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 stock 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!
A reverse mortgage can be a smart financial move to give you more options for when and how to use all of your money.
A reverse mortgage is indeed likely to reduce the overall amount that your heirs could inherit. If you use money from the loan, then that money will not be available to be passed down. However, depending on how much of your equity you use with the reverse mortgage, your heirs will likely still inherit something from your home. And, your heirs will always have the option of paying back the reverse mortgage and keeping the home if that is what you want them to do.
More importantly, it is likely that your heirs have a stronger desire for you to live independently and enjoy life now than to inherit more from you later.
And, many people use proceeds from a reverse mortgage to help or better enjoy time with children and grandchildren now while they are still alive.
Just like reactions to red wine, more and more experts are changing their minds about reverse mortgages and recommending this product as a great way strengthen retirement finances.
Find out how much money you qualify for and assess pros and cons on your own.
