You may be asking yourself, “is as reverse mortgage right for me?” Without knowing all of the details, this can be a disconcerting question. Home equity is the largest source of savings for most people entering retirement, however few people understand how reverse mortgages work. This article sheds light on the common misconceptions that typically prevent people from considering a reverse mortgage to supplement retirement income. Reverse mortgages are not ideal for every situation though – this article will also cover the details of those situations.
Financial Planning with a HECM
The Home Equity Conversion Mortgage (HECM), or reverse mortgage, is one of the most misunderstood financial products available. In general, a reverse mortgage is a financial tool which provides homeowners with funds from the equity in their homes. Generally, no repayment is required on a reverse mortgage until the borrower moves or the property is sold. Draws from a reverse mortgage do not have to be immediate. For this reason, a reverse mortgage may be used as financial planning tool. The FHA-insured HECM is the most common type of reverse mortgage. The reverse mortgage can also provide the financial planning advantages of a secure, growing, line-of-credit (LOC) that can be an alternate source for retirement cash flow.
Despite the financial planning advantages of using a HECM in a retirement plan and the fact that there are protections in place to protect the borrower, there are still hesitations that arise from misconceptions. We’ve address the most common misconceptions below.
- The bank will own my home
This is the most common misconception. Homeowners retain title and ownership of their home, and can choose to sell it at any time. You must simply continue to the property charges and maintain the home as your principal residence. When the last borrower leaves the property, your heirs will still have the opportunity to refinance or sell the home.
- Only desperate people get reverse mortgages
While the product is often mislabeled as a “last resort” option, many reverse mortgage borrowers simply wish eliminate monthly payments. Many people use the reverse mortgage for financial planning or wish to improve the quality of their retirement by accessing a portion of their home equity nest egg.
- I will owe more than the value of the home
The non-recourse feature prevents this from happening. FHA ensures that you will never owe more than the value of the home at the time it is sold. In fact, when the last borrower leaves the home, your heirs may qualify for a reduced payoff (95% of value) for homes with no equity.
- My kids will be stuck with the bill
The non-recourse provision also extend to your heirs, meaning they will not owe more than the home’s value. There’s no recourse for any deficiency, and your heirs can sell or refinance the home if they wish. FHA takes the risk of the loan balance exceeding the home’s value.
- Lenders will pressure me to buy other products
Reverse mortgage professionals are in the business of improving lives by offering access to home equity. However, HECM loan originators cannot require the purchase of other products. There are consumer protections aimed at protecting homeowners from cross-selling schemes.
- I won’t qualify with low credit scores
HECMs have no credit score requirements. Instead, the lender uses “financial assessment” to determine if the loan is a sustainable solution for the borrower. This includes examining credit history, property charge history, and residual income. Consequently, many homeowners who do not qualify for traditional financing are good candidates for a reverse mortgage.
Not for every situation
Despite the fact that a reverse mortgage is a secured loan against your property, there are situations where a reverse mortgage may not be right for you. Here are some examples of when a reverse mortgage product doesn’t make sense for your retirement plan:
If the home is not a good fit for you. If you have the intention of selling the home in the short-run, or if the home does not meet your long-term physical needs, this may not be a good financial tool for you.
If the Reverse Mortgage doesn’t tangibly improve your financial situation. It has to make sense. For some people, paying off an existing forward mortgage still leaves them with a monthly budget short fall. If it doesn’t solve the financial crisis you are in, then it isn’t a good option for you.
If it puts a family member’s housing at risk. The loan generally becomes due when you no longer occupies the home. So if plans are not made for a someone else who lives in your home that is relying on the home, other options should be explored.
If you don’t have a plan for how to manage the proceeds. You must continue to pay property charges and living expenses for the HECM to continue. If there is reasonable doubt that this will happen, there may be other options.
Consult a professional
As with all major financial decisions, a reverse mortgage should be part of your overall strategic plan. Accessing your home equity can be a great way to add freedom and flexibility to your retirement financing, but there are factors that need to be considered. Contact a FAR representative if you have any questions about how to use a reverse mortgage to enhance your retirement plan.