Editor’s Note: For more than ten years, I have pitched the message of hope in the reverse mortgage as a missionary loan originator, mostly to people who were not in a position to do anything else. They did not prepare for retirement (for whatever reason, good and bad) and the only assets left were in their home equity. I helped a lot of good folks get a new start when there was no other way to go financially.
The process was often tough on them as it was tough on me to accomplish it. Those who found joy in badmouthing what I did was mostly not acquainted with the facts and didn’t want education for competitive reasons they defended sometimes viciously. I never participated in the bad faith use of the proceeds that the enemies of the reverse mortgage touted as true, and mostly I don’t believe many went to the casinos with their home equity proceeds.
As the years progressed, the reverse mortgage has become the butt of a lot of people’s emotional views preventing those who qualify for financial relief from enjoying the benefits of another chance at thriving in retirement. As a result, people getting a reverse mortgage would rather keep it quiet because they believed to get an RM was a symbol of their financial failure.
People entering those portals now are entering with a new set of regulations in what is called “financial assessment”. Not all will enter now but most enter and are benefited by pouring new concrete over an old financial floor. The evolving process does more to solidity the security of the plan than it did before and for many in the future, financial relief will be found in the establishment of a HECM mortgage.
Now I promote a more positive focused view of the financial side of retirement. The reverse mortgage can be a helpful tool in restructuring retirement finances and it does not have to be a bailout to make sense . Today’s focus is hoping you see the wisdom of OZ in preparing more adequately for retirement income.
Some are now promoting the idea that home equity can be wisely treated along with other assets to balance out the need for a thriving retirement. Another generation will record the results of that plan for retirement wisdom. If I am still alive when that happens, I will probably be a part of it. In the meantime, I assume the position of financial planner to those who don’t know what that is and I have only the credential of experience to promote it now.
I hold up for your scrutiny the ones that did work — as I transition a bit to tout the ones that work for you. Warren Strycker, financial professional.
December 28, 2014 | Comments (22)
They say home is where your heart is, well for millions of older Americans it’s also where their money is.
According to the National Lenders Association (NRMLA), collective home equity for seniors 62 and older is $3.73 trillion, up 22 percent since spring 2012. And this year, as they have for the last four years, about 60,000 Americans will tap that equity in the form of a reverse mortgage to help fund their retirement, pay medical bills and maintain their current standard of living.
The question is, should you be one of them?
A reverse mortgage explained
You’ve probably heard a reverse mortgage explained a dozen different ways, but essentially the lender pays you to stay in your house instead of the more traditional mortgage where you pay the lender each month to live in your home. You can receive the money in different ways, too, either in a lump sum, equal payments over a fixed period of months or years (or until your death), as a line of credit to be tapped whenever you want, or as a combination of these options. You have to be 62 or older to qualify.
It’s a loan that seems almost too good to be true. That’s why it’s usually pitched on that fantasy-making machine, otherwise known as TV. The salespeople pitching reverse mortgages are usually aging TV stars like Henry Winkler, aka, the Fonz from Happy Days, Fred Thompson, and Robert Wagner.
Reverse mortgage lenders, by tapping into your reservoir of nostalgia and goodwill, are also hoping to get you to tap into some of that good old home equity you’ve built up over the years. They know seniors, now past their prime earning years, are especially vulnerable to suggestions promising quick fixes to their financial problems.
I’m here to tell you why you shouldn’t take out a reverse mortgage — here are 10 reasons why:
- High fees
Closing costs for a typical 30-year mortgage might run $3,000. For a reverse mortgage, they could run as much as $15,000. That’s a lot of money just to access the equity in your own house. Reverse mortgages come with more regulations than a regular mortgage so that accounts for some of the additional fees. Lenders also charge more because they claim they take on unique risks, in that reverse mortgages aren’t based on your income or credit score. (Consider the value of exaggeration to those making a buck selling you something else).
- Property taxes and homeowners insurance to pay
With a reverse mortgage, the property remains in your name. And because the property is in your name, you are responsible for paying all property taxes. The lender also requires that you continue to carry homeowners insurance.
- Mortgage insurance to pay
One of the most popular reverse mortgages is called a Home Equity Conversion Mortgage, or HECM. It’s a product ensured by the Federal Housing Administration. To obtain and maintain your FHA-insured HECM, you must pay a 1.25 percent premium each year on your loan balance.
- Loan amounts are capped
With a HECM, the rule is you get about half of your equity, up to $625,500. So, for example, if you lived in a $2 million home that you owned free and clear, the most you would get is $625,500. In that case, that’s even less than half, because of the cap.
- Interest continues to accrue
Interest has a way of adding up, and it will with a reverse mortgage. That’s because your lender charges you interest on your loan balance that you continue to carry forward year after year. So the size of your loan balance will continue to grow if you don’t pay down the balance. (But, of course, since you are not making payments, the interest is not a big factor while you are alive).
- Younger spouse penalty
To limit its risk, the reverse mortgage lender bases its distribution on the younger spouse. As younger people tend to live for more years than older people, the reverse mortgage lender will scale back the size of its loan payout accordingly. With a more limited payout, reverse mortgage lenders are protected in the event you live much longer than anyone expected.
- Lack of choices
Currently, there is only one jumbo reverse mortgage lender in the country — someone who will make you a loan for more than $625,500. That company is Tulsa, Okla.-based Urban Financial of America, which makes loans up to $2.5 million. Without competition in the market, you know what that means. There’s no incentive to keep a lid on loan fees. As it is, Urban Financial will lend only an amount equal to 40 percent of your home equity.
- Benefits affected
Government entitlements such as Social Security and Medicare are not affected by a reverse mortgage. But a needs-based program such as Medicaid could be. To remain eligible for Medicaid, the reverse mortgage homeowner would have to manage how much is withdrawn from the mortgage in one month to keep from exceeding the Medicaid limit.
- Stringent repayment rules
Typically, when the last remaining borrower living in a reverse mortgage property dies, the FHA requires loan servicers to send a letter showing the balance of the loan due. Upon receipt, the heir or estate administrator has 30 days to declare whether the loan will be repaid or the home sold. If no decision is made, the lender can initiate foreclosure proceedings.
- Heirs get less
As every month passes, the homeowner with a reverse mortgage sees debt increase and equity home equity decrease. That equation doesn’t benefit heirs, so if you planned on leaving your heirs a little something, it will probably be very “little.” (Consider the value of exaggeration to those making a buck selling you something else).
Reverse mortgage alternatives
We understand that everyone has money needs that continue deep into retirement. In fact, financial experts will tell you that you need 10 times your current salary stuffed in a retirement fund to make it through your golden years. Other experts have put the number at a flat $2 million.
Although your home may represent a significant source of equity, there are just too many pitfalls associated with a reverse mortgage. If you need money out, it would be far better and cheaper to do a cash out refinance, but if that’s a problem because you don’t earn enough income to make the monthly payments, then you should sell your home, and get all the money that a sale would bring.
Your home might be where both your heart and your money are, but at some point you need to separate the two. Don’t let reverse mortgage lenders play on your sentiments. Decide to downsize, sell and move on, so you can enjoy the rest of your life with more money, not less or not if you disagree.
For those who need an infusion of cash to survive, the reverse mortgage suits them fine and mostly they are not complaining about it.