REVERSE MORTGAGES RECONSIDERED
Often criticized, these loans are getting another look.
Is a reverse mortgage worth it? Before this last recession, couples who asked their retirement advisors if they should get a reverse mortgage were often given a quick answer: “No.”
Today, the answer to that question might be “yes”. In an environment with minimal interest rates, these loans can offer retired homeowners a source of tax-free cash, either in periodic payments or a lump sum. (A HELOC is also possible.)
How does it work? A reverse mortgage allows you to borrow against your home equity while retaining ownership of your residence. Many of these loans have variable rates, consequently permitting different payment options.
Reverse mortgage balances increase with time, as there are no monthly payments to reduce principal as in a “forward” mortgage. The loan doesn’t have to be repaid until you move out of the home or pass away. At the time of repayment, the amount owed will not exceed the home’s value – but when the loan becomes due it must typically be paid in full, including interest and closing costs.
What are the qualifications? You must be 62 or older to get a reverse mortgage. You also have to own your home free and clear, or have a mortgage balance that can easily be paid off using funds from the loan. In addition, you must keep paying property taxes and homeowners insurance and maintain your residence with needed repairs to avoid defaulting on the loan.
Why not get a reverse mortgage? These products have gotten a bad rap for many reasons. At first, they were seen as loans of last resort. If you were up in age and close to outliving your money, they could give you needed income.
Then the perception of reverse mortgages began to change, thanks to marketing. Commercials for these loans appeared everywhere, with celebrities hawking them as a cure for retirement income woes. Sixty-something homeowners liked the pitch and signed up – but today, some wish they had studied the fine print.
* Reverse mortgages can come with severe fees – origination fees, closing fees and even ongoing fees to cover the risk of a possible default or the sale of the property for less than the value of the loan.
* If just one spouse takes out the loan and then dies or moves out of the house, the spouse whose name isn’t on the loan is stuck with paying off the mortgage – and that often means selling the home in question.
* You are giving up home equity. Let’s say that you have to move because of family or health reasons. How would you finance that move?
* If you have cash flow problems and can’t keep up with your property taxes or homeowners insurance, you could default and lose your home. According to Forbes, about 10% of U.S. homeowners with reverse mortgages currently face this risk.
* If you really want to use your home as an ATM in retirement, you could refinance or take out a home equity loan or HELOC with no reverse mortgage involved.
During 2011-2012, Wells Fargo, MetLife and Bank of America all got out of the reverse mortgage business. Interpret that as you wish. Their reverse mortgages represented 36% of the market. In their absence, smaller nonbank originators have picked up the slack – perhaps not the best development for interested homeowners.
So why get a reverse mortgage? Even with all the demerits that these loans have, they can be a boon to retirees searching for a consistent income stream. That includes younger retirees: a recent MetLife study shows that 15% more homeowners aged 62-64 considered a reverse mortgage in 2010 than in 1999. Forbes notes that reverse mortgage applicants trending younger, with about 70% opting for a fixed rate lump sum payment option.
There are three types of reverse mortgages. The single-purpose reverse mortgage (offered by nonprofits and state and local agencies) is the least expensive. Federally insured Home Equity Conversion Mortgages (HECMs) are HUD-backed and may only proceed after consumer counseling from an independent government-approved housing counseling agency. That is also true for some proprietary reverse mortgages available from private lenders. HECMs let you choose your cash payment option, and you can change it if you need to for a fee of about $20.
Reality can’t be ignored: many baby boomers are house-rich, cash-poor and scared of retiring with insufficient income. Is a reverse mortgage their only choice? Hardly – yet with interest rates so low and retirement savings so scant, more and more baby boomers may resolve to convert home equity into cash.
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