Reverse in Real Life when does a reverse mortgage make sense?
Reverse in Real Lifewhen does a reverse mortgage make sense? John: 65 years old • $0 mortgage • $400k home value John owns a condo and has little-to-no liquid assets. He is currently only receiving Social Security Income and is living paycheck to paycheck. Although he doesn’t have an immediate need for cash, he’s concerned about unexpected expenses that may come up in the future. John wants to be proactive and come up with a source to handle any such expenses. He read that reverse mortgages can be used on condominiums and that a HECM Line of Credit will allow any unused money in the LOC to grow over time, opening additional equity in the home.After reaching out to a reverse mortgage lender, John found out his condominium was in fact approved by HUD, because his lender checked it on the HUD Condo lookup. He was fit with a HECM product that allowed him to access his home’s equity, without having to take a out a large lump sum or even schedule monthly disbursements. The reverse mortgage was tailored to meet John’s wants: to have a growing line of credit available for unexpected expenses. He now rests easier knowing he can handle anything life throws his way. The graph above is based on John’s scenario of a 65 year old client with no mortgage balance and a home value of $400,000. See the margin, expected rate, and interest for this scenario here. Smartfi Note: Although John’s condo was approved by HUD for a HECM, if John’s condo was not approved or was inactive, John could have explored alternative proprietary reverse mortgages products to meet his needs.
What is a Reverse Mortgage
Retirement is a time many adults look forward to, but a time dread when it is fast approaching. This is due in large part to financial stability. About 50 percent of older adults fear not having enough money saved for retirement. Another 25 percent fear they will never pay off their existing debt. Fortunately, there is a lifeline for older homeowners. A Reverse Mortgage allows older citizens to afford the retirement lifestyle they want and helps them fund their basic needs and home maintenance. What is a reverse mortgage? A reverse mortgage loan is similar to a traditional mortgage because the home is used as collateral. However, it does not work like a forward mortgage — a loan used to buy a home — and does not require a monthly mortgage payment. The loan is only accessible to older adults at least 62 years old. It is only due for repayment when the borrower is no longer living in the home — in the case of death or being moved to a nursing home. Meanwhile, interest and fees are added to the monthly loan balance, which grows over the loan term. The loan might be with or without limitation on what you can do with it. You can successfully fund your retirement lifestyle with it or even invest in a venture of your choice if the loan agreement permits. Homeowners must also pay property taxes and homeowners insurance to retain the loan validity. Any action otherwise can invalidate the loan clause and make the lender demand repayment even when the borrower is still alive and living in the home. How reverse mortgage work Homeowners who are 62 or older and have considerable home equity (usually 50 percent) can borrow against the value of their home. Here is how it works: Requirements/eligibility Age A reverse mortgage applicant must be at least 62 years old. Property type Homes built on or after June 15, 1976, can be used as collateral for reverse mortgage loans. Cooperative housing owners are not eligible. Equity The loan applicant must have considerable equity in the home. Counseling The U.S. Department of Housing and Urban Development (HUD) mandates seniors interested in reverse mortgages complete a HUD-approved counseling session. The session educates the prospective borrower on the benefits and risks of taking a reverse mortgage based on their financial and personal circumstances. Responsibilities Homeowners are expected to pay property taxes and insurance once the lender disburses the requested fund. The lender may request repayment if there is any default. Types of reverse mortgage There are three types of Reverse Mortgages: Single-purpose Reverse Mortgage These loans are provided by nonprofits, state, and local governments. They come with restrictions on what you can do with the fund, such as for repairs or improvements. Home Equity Conversion Mortgage Home Equity Conversion Mortgages (HECMs) are backed by the HUD. They do not come with restrictions on the use of funds. Proprietary Reverse Mortgage Proprietary reverse mortgages are offered by private lenders. The lender sets their eligibility criteria, rates, fees, and terms. They are considered the easiest to get considering there are lots of available lenders. Things to consider before taking a reverse mortgage It’s not interest-free A reverse mortgage is not an interest-free loan. The interest can be fixed or adjustable depending on the lender. For instance, as of June 20, 2023, the fixed rate for a reverse mortgage loan with a lending limit of $1,089,300 was about 6.680% for a fixed rate and 7.035% for an adjustable rate. Home Equity Reverse Mortgage Rate. Better to inform your heirs and/or partner If you stay with your spouse, informing them when you are considering a reverse mortgage is better. Likewise, if you have heirs looking forward to inheriting the home, discuss your plan with them. This will prevent them from the shock of learning about this afterward. The lender, upon your death, will try to sell the home to recover their loan, except your heirs repay it from their pocket. Right of rescission For most reverse mortgage agreements, you have three business days after the loan approval to cancel the deal without incurring any penalty. This is known as your right of “rescission.” CORY WEINBERG JUL 03, 2023
Alleviating the Burden of Today’s Inflation with a Reverse Mortgage
Inflation can be a major burden for retirees, especially during times of high inflation like we are experiencing now. Although many Americans plan for some degree of inflation to occur during their retirement, most seniors could not have anticipated the highest inflation in 40 years to occur now. Rising prices on everyday necessities can put a strain on their fixed income and make it difficult to maintain their standard of living. One way for retirees to alleviate the burden of inflation is by taking out a reverse mortgage. A reverse mortgage is a type of loan that allows homeowners over the age of 62** to tap into their home equity to receive regular payments, a lump sum, or access a line of credit. This can provide retirees with a source of income that can help them keep up with rising prices and maintain their quality of life. Additionally, as long as they remain current on their property taxes, insurance, and other property charge payments, the loan does not need to be repaid until the borrower passes away, sells the home, or moves out permanently. One of the key benefits of a reverse mortgage is that it allows seniors to remain in their homes while having the ability to use their home’s equity as a source of income to cover their expenses. This can be especially helpful for those who are struggling to make ends meet and do not want to downsize or move into a long-term care facility. Another advantage of a reverse mortgage is that it can provide a financial cushion to fall back on in case of unexpected expenses or an emergency. With a reverse mortgage, seniors can access a portion of their home equity to cover unexpected costs, such as medical bills or home repairs, without having to worry about repaying the loan immediately. It’s important to note, however, that reverse mortgages are not for everyone. Homeowners who are considering a reverse mortgage should consult with a financial advisor and be sure to review their particular circumstances before taking out the loan. Overall, a reverse mortgage can be a useful tool for retirees who are struggling to keep up with inflation and maintain their standard of living. By providing a source of income and a financial cushion, a reverse mortgage can help seniors remain in their homes and enjoy their retirement, even during times of high inflation. If you have a client who you think might benefit from a reverse mortgage, let’s get in touch and see how this product can help them alleviate the burden of today’s high inflation. **Age requirements differ by product and state.
4 Ways to Supplement Your Social Security Benefits in Retirement
By Kailey Hagen – Jun 26, 2023 at 7:30AM Diversifying your retirement income can make your future a lot more comfortable. Social Security is a valuable source of retirement income, and despite many people’s fears, it won’t disappear anytime soon. Even the latest and gloomiest Social Security predictions indicate the program will still be able to pay some benefits to qualifying seniors in 2097 and possibly beyond. But it’s probably never going to cover all your retirement expenses. If you want to maintain a comfortable lifestyle, you need additional sources of income to supplement your monthly Social Security checks. Here are four options to consider. IMAGE SOURCE: GETTY IMAGES. 1. Personal savings Having a sizable nest egg to cover the bulk of your retirement expenses is ideal. Though the government has rules about when you can make penalty-free withdrawals from retirement accounts and when you pay taxes on those funds, it’s largely up to you to decide when and how you use that money. You can withdraw large sums to cover emergency expenses or to fund travel or expensive hobbies. And when life is quieter, you can withdraw less, allowing your remaining savings to continue growing. It’s worth setting aside what you can for retirement, even if that’s only a few dollars each month. It builds a strong habit and, if that money is invested for decades before you use it, it could grow to be worth thousands of dollars. If you aren’t able to make regular retirement contributions right now, see if you can free up some cash by starting a side hustle or reducing expenses. If you get a raise, put the extra money into a retirement account. And set aside windfalls, like tax refunds or year-end bonuses, if you’re able to do so. 2. A job Working in retirement isn’t how many people envision spending their senior years, but it can provide a steady paycheck and some much-needed financial security to those who don’t have a lot of personal savings. It can also give you a sense of purpose and an opportunity to connect with others. It might be possible to switch to part-time employment at your existing job, depending on what you do. But if that’s not an option, you may have to switch employers or fields. This could be an opportunity, though. You may be able to find something that’s more in line with your interests so work doesn’t feel like a chore. 3. Rental income Seniors who own extra property can rely on rental income during retirement. This could be a long-term rental for people living in the community or a short-term rental for those just passing through. You will still be responsible for the insurance and any maintenance the property requires, but even with these expenses, you can still earn a substantial sum each month. However, not everyone is comfortable renting out their space to others. If this feels like too much work for you, it may not be the best way for you to supplement your Social Security checks in retirement. In that case, you could think about selling the extra property and adding that income to your personal savings. 4. Reverse mortgage Reverse mortgages are a way adults 62 and older can tap the equity they already have in their homes to get some extra cash. To do this, you need to own a home and you need to have at least 50% equity. If you qualify, you can receive a lump sum or a line of credit you can tap as needed. And you won’t have to make any payments on the loan as long as you’re alive and living in the home. But this isn’t a great fit for everyone. The entire balance of the reverse mortgage comes due if you leave the home, so it’s not the right choice for those who don’t expect to live at the property long-term. It might also be a poor fit for those who want to pass the property to their descendants. They’ll have to pay off the balance of the reverse mortgage upon your death, and if they can’t, they won’t be able to keep the home. No one knows your financial situation and your hopes for retirement better than you, so only you can decide on the best strategies for supplementing your Social Security checks. You could use one or a combination of the strategies above, but see if you can brainstorm additional ways to bring in extra cash as well.
Understanding Reverse Mortgages: What It Is and How Does It Work | Money
Story by Jeremi Davidson • Yesterday 11:44 AM A reverse mortgage is a home loan that allows older homeowners to borrow against their home’s equity. Unlike a traditional loan, a reverse mortgage doesn’t require the homeowner to make monthly mortgage payments. Instead, the borrower receives money from the lender — either monthly, via a line of credit or in a single lump sum at closing. These loans are typically reserved for borrowers 62 and up (though some lenders allow for ages down to 55). Homeowners often use them to reduce their monthly housing costs or increase their income in retirement. Keep reading to learn more about reverse mortgages, how they work and whether they might suit you in retirement. Table of contents What is a reverse mortgage? A reverse mortgage is a loan that allows seniors to borrow a portion of their home’s equity. They can access these funds as one upfront sum, via regular monthly payments or on an as-needed basis. The amount of money borrowed via a reverse mortgage is only due when the borrower: Many older homeowners use reverse mortgages to supplement their income in retirement. Reverse mortgages can also help reduce housing expenses (because there are no monthly payments), increase cash flow or pay for home repairs or improvements. Types of reverse mortgages There are three different types of reverse mortgages: Home Equity Conversion Mortgages (HECMs), proprietary reverse mortgages and single-purpose reverse mortgages. Like regular mortgages, these loans can feature fixed or adjustable rates. Fixed-rate mortgages give you a set interest rate for the entire loan term, while your interest rate can fluctuate over time with an adjustable-rate reverse mortgage. Some lenders offer multiple types of loans, each serving a unique purpose. Understanding the differences between each one will help guide you to the right financial product to meet your needs. Home Equity Conversion Mortgage (HECM) The most common type of reverse mortgage is a Home Equity Conversion Mortgage (HECM), which is federally backed and regulated by the Federal Housing Administration (FHA) and the U.S. Department of Housing and Urban Development (HUD). It’s only available through a HUD-approved lender. Every HECM borrower must be 62 or older and participate in a HUD-approved HECM counseling session before taking out a reverse mortgage. During this session, you’ll learn about the HECM program’s requirements, repayment options and tax implications. Your counselor will also discuss your individual needs and finances. HECMs come with FHA insurance and are non-recourse loans, meaning you’ll never owe more than your house sells for, even if your outstanding loan balance is larger. However, you must pay a mortgage insurance premium (MIP) with a HECM. This service costs 2% of your loan upfront and 0.5% of your outstanding balance annually. HECMs offer several options for receiving your funds, depending on your financial needs: With a HECM, the maximum amount you can borrow is $1,089,300 for 2023, though the amount you’ll qualify for depends on the appraised value of your home, your existing mortgage balance and other financial details. Your lender will require an appraisal of your property to determine its value before moving forward. Proprietary reverse mortgage Proprietary reverse mortgages are available exclusively through private reverse mortgage lenders. Private reverse mortgage lenders set their own terms, which may differ from HUD loan terms. Some call these loans jumbo reverse mortgages, as they can exceed the limits set by HUD for HECM loans, with some lenders offering up to $6 million. These loans also don’t have to adhere to HECM’s age rules. As a result, many lenders allow borrowers as young as 55. Since the federal government doesn’t insure proprietary reverse mortgages, you won’t need counseling to qualify, nor will you pay monthly insurance premiums. However, you may pay a higher interest rate because lenders are taking on more risk than with government-backed loans. Single-purpose reverse mortgage Single-purpose reverse mortgages are loans designated for a specific, lender-approved goal, like paying property taxes or improving your home. State and local government agencies and non-profit organizations offer these loans, and they typically have lower fees and interest rates than other reverse mortgage products. Eligibility requirements are also less rigid, making them easier to qualify for than a HECM or jumbo reverse mortgage. How does a reverse mortgage work? An easy way to think of a reverse mortgage is as an advance on your home’s eventual sale. The lender sends you the money, either in monthly payments, periodic withdrawals or as a lump sum. When you die or sell your house, you or your heirs will repay the loan out of your home’s sale proceeds. During your reverse mortgage term, you won’t need to make payments to your lender — although you can if you prefer. However, you must stay current on property taxes, insurance and homeowners association dues to avoid liens. You must also maintain the property — if your roof needs replacing, it falls on you to pay for it. If you fail to meet these obligations, your lender could call your loan due or even foreclose on your house. Pros and cons of reverse mortgages As with any loan, reverse mortgages have benefits and drawbacks. Understanding the pros and cons of reverse mortgages can assist you in making the right decision for your future finances. You’ll probably hear a lot about the benefits of a reverse mortgage, and much of this information is accurate. Reverse mortgages can be advantageous to many individuals because they: However, most lenders won’t be forthright with you about the drawbacks of these loans. Some cons associated with a reverse mortgage include: Reverse mortgages can be complicated, so it’s wise to learn as much as possible about how they work before signing up for anything. The more knowledge you have on the pros and cons, the easier it becomes to make a final decision. How to apply for a reverse mortgage In order to apply for an HUD reverse mortgage, you must meet HUD’s minimum eligibility requirements for a HECM loan. These requirements include the following:
Using A Reverse Mortgage When Planning Your Finances
Many of us are familiar with the traditional home mortgage when financing a house. While this is a great tool for helping people get into their dream homes, not many know that there is another option available – reverse mortgages. Reverse mortgages can have huge benefits and advantages if used properly, especially as part of a financial planning strategy. In this post, we’ll explore how a reverse mortgage works, and how you can use reverse mortgages to your advantage in helping you achieve your retirement goals. Reverse Mortgage Overview As we grow older, our financial needs continue to change. With retirement age inching closer, many seniors look for ways to borrow against home equity. A reverse mortgage is one option that allows a homeowner to do just that. Unlike a traditional mortgage, a reverse mortgage is a type of mortgage that pays homeowners during their retirement years. In 2021, there were 49,207 applicants for reverse mortgage loans, but it’s important to note that this option has both advantages and disadvantages and may not be suitable for everyone. Benefits of Using a Reverse Mortgage to Supplement Your Retirement Income A reverse mortgage allows 62 years and older homeowners to convert a portion of their home’s equity into tax-free cash without selling their home or making monthly mortgage payments. A reverse mortgage can provide extra funds to cover daily expenses or unexpected costs and help seniors maintain their independence and improve their overall quality of life. So if you’re looking for a smart and secure way to enhance your retirement income, consider exploring the benefits of a reverse mortgage today. Negative Implications of Utilizing a Reverse Mortgage Although reverse mortgages can provide a valuable source of income for seniors looking to tap into their home equity, it is important to consider the potential negative implications before committing to this type of loan. One major concern is its impact on the borrower’s heirs. Since the loan must be repaid in full when the borrower passes away or sells the home, it can significantly reduce the inheritance they hoped to leave behind. Another consideration is the high fees and interest rates associated with reverse mortgages, which can quickly eat into the home’s equity. It is important to carefully weigh the pros and cons before deciding whether a reverse mortgage is right for you or your loved ones. The Types of Reverse Mortgages Available There are three main types of reverse mortgages available, and each has its own unique set of features and benefits. As with any financial product, it is important to carefully consider the pros and cons of each type of reverse mortgage before deciding which one is right for you. The Qualifying Criteria for Obtaining a Reverse Mortgage Obtaining a reverse mortgage isn’t automatic. Certain qualifying criteria must be met before a lender can provide a reverse mortgage. First, the homeowner must have at least 62 years of age and significant equity in the home. Secondly, the home must be the homeowner’s primary residence. Lastly, the homeowner must be able to pay property taxes and homeowners insurance independently. By meeting these criteria, homeowners can unlock the equity in their homes without having to sell or move out. Pros and Cons of Reverse Mortgages Conversely, a reverse mortgage can provide a much-needed cash infusion, which can be especially helpful to those on a fixed income. On the other hand, there are significant drawbacks to consider. Interest rates tend to be higher than traditional mortgages, and the fees can be substantial. Because a reverse mortgage means borrowing against the equity in your home, it can ultimately decrease the amount of inheritance you leave behind for your loved ones. Ultimately, the decision to take out a reverse mortgage is complex and requires careful consideration. Bottom Line Taking out a reverse mortgage can provide your retirement years financial security, but it should not be taken lightly. Each situation and individual is different, so carefully evaluate the risks and rewards before committing to a reverse mortgage. As with other decisions in life, thoroughly discussing your decision with family and professionals is always recommended due to the complexity of financial planning. A reverse mortgage can help supplement your retirement income, but only if the pros outweigh the cons for you and they fit into your overall plan for a happy and secure retirement. By Jacob Maslow -June 21, 2023
Who is a Reverse Mortgage Good For?
Reverse in Real Life – when does a reverse mortgage make sense?Carol: 62 years old • $100k mortgage • $600k home valueCarol is retired and recently widowed which has reduced her income while her bills have remained the same. She only owed about $100k on her mortgage and had plenty of equity in her $600k home. She decided to reach out to her mortgage broker to look into doing a refinance. A traditional refinance could help reduce her mortgage payment, but with the direction the economy has been headed in, she wanted a bit more financial security. A traditional refinance wouldn’t do enough to help since her rate was already under 4%. A cash out refinance would only increase her monthly payment while giving her money she doesn’t need right now. Her mortgage banker looked into a HELOC, but that is a temporary solution that would force her to spend more on her monthly liabilities, while having the risk of payments increasing down the road. Thankfully, her mortgage broker knew about reverse mortgages, and he suggested she refinance to a reverse mortgage for peace of mind and additional security. The reverse mortgage paid off her mortgage balance and set her up with an open line of credit. The reverse mortgage also gave her the security of eliminating her required monthly mortgage payment, thus reducing her monthly bills. Carol greatly benefited from this fantastic financial tool because not only did it make her mortgage payments optional* (giving her the freedom and flexibility to make payment if she so chooses), but it also provided her with an open line of credit that she can access at any time, AND of which the unused credit grows** at the same rate as her reverse mortgage interest rate. This means more security now and down the road. SummaryCarol used the reverse mortgage to:Pay off her existing mortgageMake her monthly mortgage payments optional*Create an open line of credit for future expenses If Carol’s situation sounds similar to a client of yours, let’s get in touch. A reverse could be the solution they’ve been looking for. *Borrowers must pay property taxes, insurance, any HOA fees and maintain the property.**Growth factor is not available on all reverse mortgage line of credits.
What if you can’t afford long-term care?
As many as 8 in 10 older Americans couldn’t afford more than four years in an assisted living facility or two years in a nursing home, according to a 2023 analysis by the National Council on Aging and the LeadingAge LTSS Center @UMass Boston. Posted 9:34 a.m. Yesterday — Updated 8:38 a.m. Today By KATE ASHFORD of NerdWallet As many as 8 in 10 older Americans couldn’t afford more than four years in an assisted living facility or two years in a nursing home, according to a 2023 analysis by the National Council on Aging and the LeadingAge LTSS Center @UMass Boston. This is particularly hard for people in the monetary middle, defined by Pew Research Center as “those with an annual household income of about $52,000 to $156,000 annually in 2020 dollars for a household of three.” They don’t have enough to pay for long-term care, but they have too many assets to qualify for government assistance. Medicare also doesn’t cover long-term care. What are the options for the 47 million households with older adults who will face this scenario? From reverse mortgages to hybrid insurance policies, here are some avenues available to people who can’t afford the care they need. CONSIDER A REVERSE MORTGAGE If you have significant equity in your home and you’re at least 62 years old, a reverse mortgage can provide a helpful stream of income. A reverse mortgage is a loan or line of credit based on your home’s equity. You tap the equity now and pay the loan off when the home is sold. “What most people do, especially in a situation like a long-term care issue — once they’re out of the house, you sell it and use the proceeds to pay it off,” says Nicholas Bunio, a certified financial planner in Downingtown, Pennsylvania. A reverse mortgage has downsides — closing costs are expensive, similar to taking out a traditional mortgage, and you’ll leave less to heirs — but if you’re planning to receive home care or there’s a spouse still at home, it can be a solid option. (Once there’s no one living in the home for a year or more, the home must be sold to pay back the loan.) PRICE OUT INSURANCE If you have no major health issues, get quotes for long-term care insurance. Although experts recommend purchasing by age 65, you may be insurable up to age 79. Premiums can be pricey, but note that a semiprivate room in a nursing home costs more than $94,000 per year, according to the 2021 Cost of Care Survey by Genworth, an insurance company. “In many cases, long-term care insurance is a lot less expensive than the actual cost of care,” says Michelle Gessner, a certified financial planner in Houston. “So $1 of premium gives you multiple dollars of benefits, and that’s not the case with paying for it out of pocket.” Another option may be a permanent life insurance policy with a long-term care rider, often called a hybrid policy. Arrangements vary, but typically you can use some or all of your death benefit to pay for long-term care during your lifetime, and anything you don’t use will be paid to your estate when you die. “People complain that they’re expensive,” Gessner says, but she points out that nursing home care can cost $6,000 to $7,000 a month (or more). “What I tell people is just get what you can afford,” she says. “It’s not all or nothing.” LOOK INTO FACILITIES WITH BENEVOLENT FUNDS Some nursing homes or assisted living communities offer benevolent care, meaning they’ll take someone in who doesn’t have enough money to pay full freight or who can’t pay full price for long. When someone runs out of money, the benevolent fund covers the difference for as long as they need care. (They’ll typically collect Social Security and pension payments that may come in to help cover costs.) “They can be a good alternative for people who think they won’t have enough financial assets,” says Diane Pearson, a certified financial planner in Wexford, Pennsylvania. Benevolent care funds are often connected to faith-based communities. A search for faith-based facilities in your area might yield some options. ASK ABOUT A LIFE SETTLEMENT If you have a life insurance policy and you’re considering letting it lapse or taking the cash value from it, a life settlement may be the better option. In a life settlement, a third party buys your insurance policy, and you typically receive between 5% and 25% of the value of the death benefit. “There are investors out there who will basically make the premium payments on your behalf, but they keep the policy proceeds when you pass away,” says Christopher Lyman, a certified financial planner in Newtown, Pennsylvania. You might make this choice in a financial crisis. “The only reason you would do that is kind of like a last option,” he says. ___________________________________ This article was provided to The Associated Press by the personal finance website NerdWallet. Kate Ashford is a writer at NerdWallet. Email: kashford@nerdwallet.com. Twitter: @kateashford.
Bridging the Gap Between Living Expenses and Social Security Income with a Reverse Mortgage
Planning for and maintaining retirement can seem like a difficult task, especially when it comes down to the finances of it. Figuring out how to bridge an income gap between living expenses and Social Security is a common problem for: If this sounds like any of your clients, then let’s take a look at how a reverse mortgage can bridge this gap, and how it compares to some alternative solutions: Solution 1: Getting a Reverse Mortgage Nearly 80% of senior households own a home, making a reverse mortgage a very real option for bridging a gap between Social Security and expenses. Whether your client owns their home outright, or has a traditional mortgage on it, a reverse mortgage can be an asset in their retirement strategy. By using the equity in your client’s home, a reverse mortgage makes payments to the homeowner in the form of a lump sum, line of credit, monthly payments, or a combination. A big appeal of the reverse mortgage is that no mortgage payments are required;* the loan is typically paid back when the last borrower leaves the home or passes away. Additionally, one of the best features of a reverse mortgage is that it is a non-recourse loan, meaning it can only be paid back from the home and the borrower is not liable beyond the value of the home when the loan comes due. Typically, the loan is paid back through the sale of the home or refinancing the property into a traditional mortgage. *Borrower must pay property taxes, insurance, HOA fees and maintain the property. EXAMPLE In this illustration, not only does the current monthly mortgage payment of the traditional mortgage get eliminated, but the client also receives a certain amount from their line of credit on a monthly basis, over the specified period of time. By utilizing a reverse mortgage, the client bridges their income gap for those 8 years, is able to maximize their Social Security benefits, eliminates their required monthly mortgage payment,* and has access to a growing line of credit for future and emergency use. Example uses a 62-year-old client with a $800,000 home value, receiving a total principal limit of $271,200 based on an expected rate of 6.370% (11/9/22). See the estimated loan details here. *Borrower must pay property taxes, insurance, HOA fees and maintain the property. How a Reverse Mortgage Compares to Other Solutions Alternative Solution No. 1: Work part-time This option is fairly straightforward in how it can help bridge an income gap between expenses and Social Security: every hour worked means more income. Some seniors may find this appealing, especially as a way to “phase out” of work and into full retirement. However, if your client is considering working and wants to receive Social Security benefits, they need to be mindful of their full retirement age. If they are not yet at full retirement age and their income is more than the yearly earnings limit, then their Social Security benefit will be reduced. If your client is of full retirement age, then their benefits will not be reduced, regardless of the income they earn. Of course, if your client doesn’t want to work, then this isn’t a great option for them in their golden years. A reverse mortgage can get them the income they need without requiring them to work. If your client is keen on working, then this could even be an option alongside a reverse mortgage, providing two solutions to bridge the gap. Alternative Solution No. 2: Use savings Another option to bridge an income gap is to utilize savings. This can mean dipping into a regular savings account, an IRA or 401(k), or even a whole life insurance policy. When considering this approach, your client should be sure to think about what withdrawals will be taxable, if any fees will apply, and they should determine the timing and amounts that would be most suitable for them. When compared to a reverse mortgage, we start to see where this solution’s limitations are. For instance, the savings can be depleted before the person passes, whereas the funds from a reverse mortgage can be structure for a specific period of time (term) or for life (tenure). A savings account may not be as subject to the market conditions since you’ll always have the principal balance, whereas the unused portion of the line of credit can actually increase in value due to its growth rate. Income from some types of savings or retirement accounts may be taxable, whereas in general, income from a reverse mortgage is not. All clients should be advised to discuss their specific situation with their financial planner or advisor to ensure a reverse mortgage is the right financial solution. Alternative Solution No. 3: Deferred or immediate income annuity Finally, purchasing an income annuity1 can be a solution to bridging an income gap, however you may have to deplete the cash or savings you have on hand to purchase it. A specifically designed reverse mortgage, can also provide a guaranteed income stream for a desired time frame, regardless of the ever-changing market or economic landscape. With an immediate annuity, the person makes one lump-sum contribution that is converted to a steady income stream for the specified duration. A deferred annuity allows the person to make a lump-sum, or multiple contributions, during the accumulation phase and is then converted to an income stream during the specified duration. In contrast, most reverse mortgages do not require the borrower to pay into the loan, don’t require a monthly mortgage payment,* and the income stream can be set up to continue until the borrower passes via the tenure structure. Additionally, most income annuities do not give the person access to the principal, whereas with a reverse mortgage line of credit, any payments made to the loan balance increases the available funds. 1. Deferred Income Annuity contracts are irrevocable, have no cash surrender value and no withdrawals are permitted prior to the income start date. *Borrower must pay property taxes, insurance, HOA fees and
What Is A Home Equity Conversion Mortgage?
Updated: Jun 9, 2023, 2:14pm Getty A home equity conversion mortgage (HECM) is a reverse mortgage that enables seniors to access their home equity without selling their homes or making monthly mortgage payments. HECMs are the most popular type of reverse mortgage available. Nearly 65,000 senior homeowners took out a HECM from Oct. 1, 2021 through Sept. 30, 2022, according to the National Reverse Mortgage Lenders Association. How Do Home Equity Conversion Mortgages Work? Instead of gradually paying a lender back each month, all the money you borrow with a HECM is due when you move out of your house. That sum consists of the principal, interest and mortgage insurance—and closing costs if you finance them. Your move might be caused by your death, a need for assisted living or another reason. You can borrow the money as a: The lump sum has a fixed interest rate while the other options have a variable interest rate. Regardless of the option you choose, you can use your HECM proceeds however you want and continue to own your home. The amount you can borrow is based on three factors: Experts: Consider HECM Lines of Credit Like any mortgage product, HECMs come with notable risks, including being used to scam seniors out of their home equity. However, these loans also have a legitimate purpose and can be a good tool for borrowers who need to supplement their income during their retirement years. Some retirement planning experts have advocated for broader use of the HECM line of credit option. They say seniors should set one up as soon as they’re eligible. Even if you don’t need it now, the line of credit grows over time and can provide a diversified source of retirement income. For example, you could tap your home equity in years when you might otherwise have to sell investments at a loss to pay for living expenses or medical costs. You won’t pay interest unless you actually borrow money. But you’ll pay closing costs to set up the line of credit, whether you use it or not—which can be a deterrent. Who Is Eligible for a HECM Loan? You must meet these basic requirements to qualify for a HECM: How To Apply for a HECM Loan HECM loans are only available through reverse mortgage lenders approved by the Federal Housing Administration (FHA). You can find one through the FHA’s website or find lenders first, then check with the FHA to make sure they’re approved. If possible, it’s best to get preapproved or prequalify with multiple lenders to find the best offer before submitting an official application. Preapproval and prequalification have no impact on your credit score. The government has many requirements lenders have to follow when issuing HECMs. However, it doesn’t tell lenders what interest rate to charge. A lender with lower fees may charge a higher interest rate. Fees and other closing costs can vary by lender, although HECM lenders can’t charge more than $6,000 in origination fees. No matter which lender you choose, you can shop around for better prices on third-party closing costs, such as title insurance and closing services. You’ll also want to pay attention to how much and how often the interest rate can change if you apply for a HECM with a variable rate. HECM vs. Reverse Mortgage All HECMs are reverse mortgages, but not all reverse mortgages are HECMs. Some lenders offer their own proprietary reverse mortgages. HECMs are tightly regulated by HUD, with protections for both borrowers and lenders. All lenders must follow HUD’s rules. Proprietary reverse mortgages, on the other hand, have more lenient requirements, with more room for lenders to set their own parameters. Mortgage Insurance Premiums One of the most notable rules is that you’ll have to pay mortgage insurance premiums (MIPs) when you get a HECM. The upfront premium costs 2% of your home’s value (the maximum claim amount); ongoing premiums cost 0.5% of the outstanding loan balance each year. HECMs have a government guarantee that limits lenders’ losses if the borrower owes more than the home is worth when the mortgage is due. This guarantee also prevents borrowers and their heirs from having to make up any shortfall. As a result, all HECM borrowers must pay MIPs that go into the guarantee fund that helps make these loans possible. Proprietary reverse mortgages don’t have this mortgage insurance requirement. Age Requirements Another key difference is that you must be at least 62 years old to get a HECM. You may be able to get a proprietary reverse mortgage at a younger age, such as 55, depending on the lender and your state. Borrowing Limits A proprietary reverse mortgage also allows you to borrow far more—into the millions, depending on the lender and how much your home is worth. It can be a good option if you want to borrow more than HUD allows with a HECM, based on a maximum home value of $1,089,300 in 2023. HECM Alternatives A key reason for choosing a HECM is that you don’t meet the income or credit requirements to get another type of loan. But there are many other ways to use your home equity in retirement—and borrow without using your home as collateral. You don’t have to be working to qualify for a loan. You can get a mortgage after retirement (or get another type of loan) based on your retirement income, including Social Security, Supplemental Security Income, retirement account withdrawals, pension payments and more. A financial advisor can help you decide whether a HECM or an alternative option below may best meet your goals. By Amy Fontinelli