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Oftentimes, American families can be challenged when preparing for retirement. With the decline of traditional pensions and employee-sponsored retirement plans, many people who are leaving the workforce today are doing so without a strong financial safety net.
In fact, according to a 2013 Merrill Lynch1 survey, running out of money to live comfortably is a top concern of Generation X, Baby Boomers and the Silent Generation. Among the “greatest worries” about living a long life, finances were number one, followed by being a burden as the top concerns reported by this population.
Yet despite these worries, many American families have a major financial resource they may not have considered – their home.
How a reverse mortgage can help: A reverse mortgage may not be right for every household, but for many people it is a tool that can provide a series of benefits. Reverse mortgages have recently gained acclaim among several renown financial planning professionals including those at Texas Tech University, The American College,2 MIT and others, who have shown through their research that households are better off financially when they have a reverse mortgage.
How it works: A reverse mortgage, most often in the form of a HECM (Home Equity Conversion Mortgage) and insured by the Federal Housing Administration, enables the borrower to receive cash flow from the home equity he or she has—essentially a mortgage “in reverse.”
The borrower can choose to receive loan proceeds via initial “lump-sum” draw, monthly or term payments, or can access the home equity via a HECM line of credit.
Requirements: Borrowers must be at least 62 years old to qualify, must live in the home as a primary residence and must own their home outright or have a substantial amount of home equity. In most cases, all borrowers must also attend reverse mortgage counseling, and it is encouraged for adult children to attend as well. Just like in a “forward” mortgage, the lender will conduct a financial assessment to determine whether the borrower meets income and credit standards associated with the loan.
Property charges: Similar to a forward mortgage, the borrower must continue to pay property taxes and maintain the home, pay the homeowners’ insurance policy and any homeowner fees as terms of the loan. Failure to adhere to these terms can result in the loan coming due, at which point it needs to be repaid.*
Repaying the loan: The loan is due when the borrower passes away or moves from the home permanently, or can be called due if the borrower does not meet the terms of the loan such as occupancy, payment of property taxes, fees, and insurance.
Many adult children wonder if a reverse mortgage impacts their parents’ home inheritance. A reverse mortgage is a loan, and it accrues interest over time. If the borrower has passed away when the loan balance comes due, the heirs are responsible for repaying the loan, which most often is done by selling the home. It is important to note that when the property is sold neither the borrower, nor the borrower’s heirs, will ever have to repay more than the home is worth at the time of sale. Federally-insured Home Equity Conversion Mortgages come with this very important feature. However, if the borrower’s heirs would like to keep the home once the borrower passes away, they can choose to pay off the loan balance using other funds, and keep the home.
Potential Benefits: For parents who want to potentially avoid burdening their adult children or other family members, a reverse mortgage can be a very viable option either to increase cash flow, or provide a credit line that can be utilized in the event of an emergency or an unforeseen expense.
If you would like to learn more about how a reverse mortgage can potentially help your family, contact a Finance of America Reverse mortgage professional today!
1Merrill Lynch, Age Wave “Finances in Retirement: New Challenges, New Solutions,” A Merrill Lynch Retirement Study, conducted in partnership with Age Wave 2017.
2Phau, Wade D. Ph.D., CFA. Professor of Retirement Income at The American College, 2015. Journal of Financial Planning, Financial Planning Association. “Incorporating Home Equity into a Retirement Income Strategy.” https://www.onefpa.org/journal/Pages/APR16-Incorporating-Home-Equity-into-a-Retirement-Income-Strategy.aspx (Assessed 5/24/17).
*If the borrower does not meet loan obligations such as payment of property taxes, fees, hazard insurance and maintaining the home, then the loan will need to be repaid. The home must be the primary residence.