Reverse Mortgages carry a stigma. Some people fear that a reverse mortgage will impose financial distress on the borrower or somehow bilk the older generation out of their nest egg. Not true! Reverse mortgages are one of many financial vehicles that seniors could consider as part of a sound retirement plan. Unfortunately, the concept is riddled with misconceptions. The confusion probably started because some brokers misused reverse mortgages in the past and gave a good product a bad name. The Department of Housing and Urban Development stepped in and regulated this portion of the industry in 1989 with the creation of the Home Equity Conversion Mortgage (HECM). Still, the rumors persist.
Although some bad actors in our society continue to make trouble for seniors, the HECM is a legitimate loan product that may be a good fit for you or a family member. In addition to the HECM, there are some up-and-coming hybrid loan products by which homeowners can benefit from reverse financing. Read on to learn a few of the features that HECMs and other reverse mortgages offer.
Instead of paying monthly, borrowers receive a monthly or lump-sum check. It’s the reverse of a traditional mortgage. A HECM can also be structured with a line-of-credit option. Traditionally, borrowers make a payment each month and slowly watch their home equity increase. With a reverse mortgage, home equity decreases over time while the borrower receives cash. (This is called negative amortization.) Hybrid and line-of-credit products also exist for borrowers who may want to increase or decrease their cash payouts as needed. You can even use a reverse mortgage to pay-off a traditional mortgage if one is still attached to the home.
Retirement planning is speculative and sometimes the markets favor growth over income. In other words, a retiree may have less passive income than they expected and find it hard to pay their bills. A reverse mortgage provides cash to pay for things that can’t be avoided - things like utilities, property taxes, and medical expenses.
According to FHA regulations, borrowers may retain ownership of their home even if they outlive their reverse mortgage.
Each monthly payout to the borrower accounts for a mortgage insurance premium payment to FHA, also known as a MIP. This provides a safety net that could come into play if the borrower(s) want to sell the home but owe more than the current market value.
This is another scenario where mortgage insurance could come into play. If the borrower or borrowers pass away, heirs can sell the home for as low as 95% of the appraised value and the FHA mortgage insurance will reimburse the lender for the difference, alleviating any loan balance that the heirs might have inherited. Of course, if the home is worth more than the loan balance, the heirs could sell the home to pay off the loan balance and keep the profit.
Industry regulations do stipulate that borrowers must keep their homes in good repair, have a homeowner’s insurance policy in place, and pay their taxes on time – basically the same standards that society imposes on every homeowner. But décor choices, house guests, pets, etc. are still the owner’s business. A reverse mortgage will not result in the lender choosing your paint colors or telling you who can stay at your house.
Each borrower, home and loan are unique. It is important to work with an experienced loan officer who will give time and attention to your overall financial plan. Also, know that reverse mortgages do have maximum loan limits and borrowers must be at least 62 years old to qualify. The Ruoff team is experienced with HECM products and other reverse mortgage loans. Start online to find a knowledgeable loan officer in your area. A reverse mortgage, when timed and underwritten properly, can free up cash flow and provide peace of mind for senior borrowers.
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