The HECM (Home Equity Conversion Mortgage), more commonly known as a reverse mortgage, is designed to help older Americans age in place and enjoy retirement.
Since its inception, the reverse mortgage program has been widely misunderstood, sometimes misrepresented and often overlooked by financial planners and consumers alike.
It’s important to get the facts before making a decision for yourself or your family. This article will examine the pros and cons of reverse mortgages, dispel common misconceptions and discuss the ways reverse mortgage loans can help solve America’s longevity funding dilemma.
How Does A Reverse Mortgage Work
If you’re like many older Americans, you’ve worked hard and saved money, but you may still have concerns about having enough to live comfortably throughout your entire retirement. If you’re retired, or close to retirement, the wealth amassed in your home equity likely represents a large portion of your net worth.
Understanding how to strategically and tax efficiently incorporate this wealth into your retirement plan may be the key to prolonging and protecting your overall portfolio. How we plan to fund our longevity is very different today than in decades past. Historically, many companies provided lifetime pensions, which provided retirees with certainty and peace of mind. Today, medical expenses, longer life-spans, long-term care needs and other issues have left many older Americans in Baltimore worried about the possibility of outliving their money.
Yet, older homeowners have amassed an unprecedented $7.14 trillion in untapped home equity as of the first quarter of 2019. (Source: National Reverse Mortgage Lenders Association and Risk Span) This begs the question: Is it reasonable to ignore your largest asset when developing a financial plan?
Simply put, a reverse mortgage loan enables homeowners age 62 or above the ability to borrow up to roughly 50 percent of their home’s value. Payouts can be made to the borrower in the form of a lump sum payment, line of credit with a guaranteed growth rate, monthly payouts or a combination of all three. (We’ll touch on how the line of credit grows in a future article.)
A reverse mortgage may also be used to purchase a home. The HECM for purchase loan combines a reverse mortgage with the equity from the sale of your previous home - or from other savings and assets - to buy your next primary home in a single transaction. Regardless of how long you live in the home or what happens to your home’s value, you only make one initial down payment towards the purchase, provided that you pay property taxes and homeowner’s insurance, and maintain the property.
Reverse Mortgage Misconceptions
A common misconception about reverse mortgages is that bank owns the home. This is not the case. The homeowners retain ownership of the home, just like they would with a traditional mortgage. Unlike traditional mortgages, there is no monthly payment requirement as long as the home remains the primary residence.
Another common misconception is that rates on reverse mortgages are higher than traditional home loans. This is also false. Reverse mortgage interest rates are in line with traditional mortgage rates. Borrowers have the option to make monthly payments or to defer payback until the last remaining borrower leaves the home.
The key here is flexibility. Reverse mortgage borrowers may access their home equity on demand. The flexible payment option is designed to provide homeowners, especially those on a fixed income with additional cash flow later in life when a mortgage payment can often be burdensome. They may also pay back the loan without penalty, or sell the home at any time. Borrowers must pay their property taxes, insurance and maintain the home to comply with loan guidelines.
Reverse Mortgage Pros
Reverse Mortgage Cons
The Bottom Line
As with any product or service, education is paramount. The reality is that the home is too large an asset to be ignored. Today’s reverse mortgages are not meant to be a Band-Aid or short-term fix to larger financial issues. In some cases, someone in financial distress may be better off selling the home to access more of equity, downsizing or moving to a care facility.
In other cases, a reverse mortgage is a powerful tool that can provide a more stable, comfortable and fulfilling retirement. If you’re considering a reverse mortgage, reach out to a specialist who has expertise in this specific program and who will take the time to understand your unique needs and situation.
Steven J. Sless (NMLS: # 298581 MLO: # 49963) is the reverse mortgage division manager with PRMI. He also oversees PRMI’s office in Owings Mills – one of the nation’s only consumer-direct retail branches that deals exclusively with reverse mortgages. For more information, Contact Us, call 410-814-7575 or follow morewithsless on Facebook, Twitter, LinkedIn and Instagram.