Let’s Talk Real Estate – August 2015

Most people don’t know what a Reverse Mortgage (RM) is, and because they are a relatively-new financial mechanism for seniors in the United States, there is a lack of understanding. The reality is that RM’s may be an answer to one of the biggest economic problems facing the United States, since so many baby boomers don’t have enough money to retire.

Despite the availability of 401K plans, the Federal Reserve says that around one-third of all baby boomers have little-to-no retirement savings and are in danger of not having enough money to maintain their standard of living in retirement. If you are 62, or older, and in this situation, you have a second chance with a RM—a unique type of loan that allows you to tap the equity in your home to pay for monthly mortgage payments and/or supplement income without having to sell your home or give-up title.

Unlike traditional mortgages, a RM does not require a monthly mortgage payment—it’s the opposite, enabling you to take the equity out of your home in one lump sum—or, as long as you remain current paying your property taxes, insurance and home maintenance, take it in monthly payments. The loan balance does not need to be repaid as long as the borrower remains living in the home. In the case of a couple, when both borrowers are no longer living, the home is sold and the amount owed is paid back to the lender. This is a non-recourse loan, which means if the amount owed exceeds the value of the equity in the home, the lender has no recourse. Any surplus beyond the value of the original appraisal will be disbursed to the heirs.

Pros

  1. RM requires no repayment as long as the home is occupied and the borrower remains current on their obligations.
  2. RM enables a person to supplement a fixed income with tax-free funds.
  3. Allows the client to use their equity in whatever way they choose.
  4. If the loan is paid-off early, there are no prepayment penalties.
  5. The upfront fees can be financed into the loan to prevent any out-of-pocket costs.
  6. Requires pre-loan counseling in order to make certain that the borrower is completely informed.
  7. RM’s are federally-insured so the borrowers can never owe more than the home is worth.
  8. Provides flexible disbursement options (i.e. monthly sum or line of credit).
  9. Eliminates any existing mortgage.
  10. Interest rates may be lower than other options.
  11. Could give a borrower the money needed to get off of Medicaid and onto Medicare.

Cons

  1. Depending on the program, upfront fees can be higher than other loans.
  2. Reduces the amount of equity left to your heirs.
  3. Does not allow interest to be taken as a tax deduction until payments are made or the loan becomes due.
  4. Can become due and payable in-full if the terms of the loan are not met.

The process of getting a Reverse Mortgage involves choosing a lender, attending a session with a HUD–approved financial counselor and getting your home appraised and inspected.

For many baby boomers, their biggest asset is their home, and a RM allows them to stay in it, rather than relocate elsewhere. While you are still responsible for property taxes and any general costs and repairs associated with home ownership, the loan is simply a lien against the property. Over 50,000 baby boomers took advantage of a Reverse Mortgage last year and we will see that number climb as the understanding of these loans increases.

For more details go to Reversemortgage.com.