The Reverse Mortgage
You’ve seen the ads for the reverse mortgage. The financial planning company who interviews an individual in a taxi worried about his financial future. The interviewee says he has a life expectancy of 24 years, but only enough retirement savings for 15 years. Even with these worries in mind, adults who are spending less than the previous year continues to decline from 57% in 2009 to 29% in 2014.
Some say the reverse mortgage is the last thing that your clients would ever want, and they are the first thing they need as a last resort. Such are the opposing, yet surprisingly complimentary, views of what is still for many a highly controversial topic.
Financial planners speak of the sandwich generation. The middle age adults are caught between education and retirement expenses on one side and their elderly parents on the other side. They are strapped. They would like to make it easier for their parents to get by, but don’t have the money.
One consequence of worrying about making ends meet has been an increase in Americans over 62 taking out reverse mortgages. The number of reverse home equity conversion mortgage (HECM loans) made in each federal fiscal year peaked with the housing crisis in 2007-2009 in FY 2009 at 114,692. Loans fell off to FY 2012 at 54,822, but seem to be on the rise again. We are currently at or above last year’s 60,091.
What is a Reverse Mortgage?
“A reverse mortgage is a loan against home equity that doesn’t have to be repaid until you move, sell your home or die. You can receive a lump sum, a line of credit, monthly payments or a combination. To qualify, you must be 62 or older. (If the home is owned jointly, both owners must be at least 62.) The amount you can borrow is based on your home’s value, current interest rates and your age.” Typically at 62 the reverse mortgage is made at 50% loan to value.
To apply for a reverse mortgage was easy prior to 2015. But that has changed for many, as new regulations went into effect in 2015 that will require individuals that opt for a reverse mortgage to have financial planner counseling and they must qualify. It is still the easiest mortgage to get, but the lender wants to make sure the couple have enough income to pay taxes, utilities, and maintenance.
It’s easy to Google and find the Pros for reverse mortgages, but not as easy to get the cons. The Pros can be listed as:
- You can stay in your own home and improve your finances, assuming you have equity in your home.
- It’s flexible. It can be tailored to your financial needs or financial planner’s recommendations
- Low risk of default. You must keep up with property taxes, upkeep and insurance.
- The money you take out is tax-free.
- The mortgage cannot exceed the value of your home.
- No restriction on how you use the funds extracted.
The Cons can be listed as:
- The mortgage rate is adjustable. Adjustable rate loans can be expensive if rates go up.
- There are high origination fees.
- There are no monthly payments, but the size of the mortgage compounds.
- The interest is not deductible
- The home will have to be sold when the mortgagees die.
- There may be no equity left for your heirs.
- The homeowner may get locked into keeping the house, when a better option would be to sell and move into more affordable housing.
- The homeowner must keep up with property taxes, upkeep and insurance.
Now there’s a new kind of reverse mortgage, called a Purchase Reverse Mortgage. Suppose you have $400,000 in cash from the sale of your house in Ft. Wayne and you want to move to Florida to buy a retirement house. You could buy a house for $400,000 and use up all your cash. But then you find a much nicer house for $500,000. You could put the $400,000 down and borrow the rest or stick with the lesser house.
Enter the Purchase Reverse Mortgage (PRM). You put down $250,000 and use a $250,000 PRM for the rest. You still have no payments, and you put the $150,000 in your investment account. In 30 years the PRM is probably going to be near $750,000 with interest and the house may have appreciated to $1 Million, so you still have the equity of $250,000. Suppose the house doesn’t appreciate at all. Your parents are upside down when they die. There is no liability for the heirs. The lender would probably foreclose.
The reverse mortgage certainly is a viable option for some older Americans, especially if you are not considering moving. Others believe that a reverse mortgage is a little like a car airbag. It’s nice to know it’s there. But if it ever has to be used, the driver’s already in trouble. I’m not so sure about that conclusion anymore. It seems it is just another financial tool to use.
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