Reverse Mortgages Can Offer Freedom to Seniors

As the population ages, reverse mortgages may well be catching on. This is a loan vehicle that every loan officer needs to be educated about as the aging baby boomer population begins to view it as a way of financing their futures. 

As you know, a reverse mortgage is the mirror image of a regular mortgage. It enables older homeowners 62 or older to convert part of the equity in their homes into tax-free cash without having to sell the home, give up title, or take on a new monthly mortgage payment. The borrower retains the title of the home and the reverse mortgage comes due at the time of the death of the borrower, when he or she permanently moves out or when the house is sold.

Up until recently, reverse mortgages did not catch on as many of the elderly of yesteryear were afraid of debt. Having grown up in the depression era, this last generation of seniors did everything in their power to avoid borrowing money.

They remembered what it was like to be cash strapped, and they had no desire to go down that road. It was very common in the 50's, 60's and even into the 70's for families to pay off their mortgages in  20 years and then live debt free into retirement; a beautiful thing, but not the norm for today's baby boomers who are accustomed to debt and, let's face it, a certain lifestyle.

To give you some perspective, in 2004 only 40,000 reverse mortgages were written, today they are written daily and they are considered a Godsend to cash-strapped seniors or folks looking for new and unique ways to plan for retirement.

The reality for many is the home they are currently living in may be the cheapest housing option – certainly cheaper than assisted living or an apartment or condo complex that they would have to purchase at today's prices and rate. This is a cruel reality if you have been living mortgage free for a number of years, and still cannot afford other things. This is where a reverse mortgage can truly be a blessing.

Even for seniors with plenty of cash for retirement, reverse mortgages can assist with unexpected expenses, provide a few luxuries, or even be a vehicle to enable additional investments – all while letting the homeowner continue to retire in place. Add to that the emotional benefits of being able to stay in a home you love; remaining independent and feeling safe and secure, and this could easily be the best option. The feelings of safety and belonging can even translate into social service and health care savings that might otherwise be passed on to the public.

So now that you are convinced this is the right loan for your clients or their aging family members what are the requirements?

They are really quite simple. The borrower must be at least 62 year of age, the home must be mortgage free (or small enough to be refinanced under the constraints of the reverse mortgage,) and there are some reverse mortgage fees involved, which are usually fairly inexpensive and can generally be rolled into the mortgage. There is no income requirement nor is credit taken into consideration. Of course, an unresolved bankruptcy may cause a borrower to be declined. 
Interestingly, the older the borrower is the more he/she can borrow, but there is a cap on the amount borrowed based on the appraised value of the home. 

One of the beauties of a reverse mortgage is the freedom it allows the borrower. Once accepted, the money can be handed out as a lump sum or fixed to a line of credit to be drawn down as needed, or paid out in monthly payments over time, similar to an annuity. In each case interest accrues only on the amount that has actually been collected by the borrower. Aside from required up-front fees, a borrower might view taking a reverse mortgage as a good rainy-day strategy.

Speaking of interest, in October of this year, the Home Equity Conversion Mortgage came up with a Savers option. The FHA charges two mortgage insurance premiums on HECM Standard reverse mortgages. An upfront premium based on your home's appraised value. The second is an annual premium of 1.25 percent of the loan amount.The HECM Saver reverse mortgage drastically reduces the upfront mortgage insurance premium from 2 percent down to .01 percent saving the borrower money.

Now that you have many of the facts, as a broker, you may be asking yourself why a home equity loan or a second mortgage wouldn't be a better option. The reasons for this are simple – banks want to be assured that they will get their money back- and many seniors don't have the income necessary to qualify for the loan; therefore reverse mortgages are ideal because they require no payment until the house is actually sold. More importantly than that, if the borrower's home declines to the point that they owe more than the house is worth, FHA will reimburse the lender for the difference. This is covered by insurance paid by the borrower to FHA during the life of the loan. If the home sells for more than was borrowed, the homeowner or his heirs are able to retain the difference.

One of the many advantages of a reverse mortgage is that it does not affect social security or Medicare. This is not additional income; this is the borrower's money that he/she is simply taking out early. It can; however impact eligibility for Medicaid and Supplemental Security Income (SSI). If a borrower receives a lump sum payment from a reverse mortgage, any amount retained the month after it's received would count as a resource and could affect SSI or Medicaid coverage. To be safe, have the borrowerConsult a tax advisor or benefits expert before going too far into the process.

Clearly, the advantages for a reverse mortgage are many, but are there disadvantages? The answer is yes. Like any other loan product, a reverse mortgage is not for everyone. If you are working with a senior who is still making an income, and who is in fairly good financial shape a home equity or a second mortgage may be the better option. Depending on what they plan to do with the money, you may also be able to offer the borrower other avenues to pursue.

For example, if the borrower is looking to replace an old furnace or do other energy based improvements there are many state run programs that would allow them to borrow a large sum of money with little or no interest payments. There is also the opportunity for an energy rebate if the improvements full under Energy Star ratings. Do some research in your area to see what else you can offer.

Remember, nothing is due on the reverse mortgage in the course of the loan; you can live outside of your home for upwards of 12 months before the mortgage comes due, and you will never owe more than your home is worth.

Some of the most important safeguards put in place to protect the consumer make the reverse mortgage; perhaps, the best bet for extra cash out there. It is required that a borrower by counseled by a third party, there are limits on the interest rate and origination fee, and there is a ceiling placed on what the borrower will owe –this is not going to put a senior out on the streets or subject them to bankruptcy. They will not lose their home to the bank at the completion of their life, and they will have spare cash to spend as they wish in their golden years.