Many homeowners plan for retirement by assuming they’ll want to downsize when the time comes. However, as they near that point, they may feel differently. Others may have paid off their mortgages prior to retiring, but find they need an additional source of income or funds to maintain their homes.
For older homeowners with a fair amount of equity, a Home Equity Conversion Mortgage (HECM), more commonly known as a “reverse mortgage,” is a tool for tapping into what may still be their largest asset to meet financial goals.
Reverse mortgages and reverse lines of credit are available to homeowners who are age 62 and older. Instead of a loan, where a lump sum is received and paid back through monthly payments, a reverse mortgage is repaid when the home is ultimately sold, or the borrower moves our or passes away. That sale has no specific date, by the way. The homeowner makes no loan payments and can choose to access the money immediately, as needed, or through regular monthly disbursements to supplement their income. There are no restrictions on how the money received through the loan may be used and it is non-taxable income.
Not What You Think
Despite regulatory changes enacted in 2013 to help clarify the rules, industry communication, and the uses of reverse mortgages, some myths and misperceptions persist. To help clear this up, here are some of the more pertinent facts.
Fact #1: Reverse mortgages are regulated just like traditional mortgages.
Many lenders are now Certified Reverse Mortgage Professionals (CRMP), a designation issued to those who adhere to the professional and ethical standards of the National Reverse Mortgage Lenders Association (NRMLA).
Fact #2: The rules for qualifying are straightforward.
A homeowner needs to be at least 62 years old to qualify, and the home must be the client’s primary residence. Only homeowners with sufficient equity may borrow. Counseling is also now required to ensure each client and their family members understand the mortgage and how it works.
Fact #3: There are different borrowing options.
Money may be withdrawn from a reverse mortgage as a lump sum or as a series of monthly payments received during retirement. Other clients can set up their loans as a line of credit. This enables them to borrow as needed to pay for large expenses. They may use the reverse line to even out their cash flow and may repay the amount as distributions from other assets are received. You can also use a reverse mortgage to purchase a home.
Fact #4: Clients retain ownership of their homes.
That said, reverse mortgage clients are required to meet the terms of the loan agreement. This means maintaining the home by making any necessary repairs, paying property taxes, and continuing to pay homeowners insurance.
Fact #5: A home with a reverse mortgage may be passed on to heirs.
Any equity that remains in a home may be passed along to a homeowner’s heirs—only the mortgaged amount is due to the lender upon sale. Heirs also have the option of repaying the debt and retaining ownership of a family home.
Fact #6: Reverse mortgages are comparably priced to other loans.
Like a traditional loan, the current level of interest rates, the home’s value, the loan terms, and local market conditions factor into the closing costs. With a reverse mortgage product, the age of the client(s) and life expectancy factor into the pricing.
Before pursuing a reverse mortgage, it’s a good idea to consult with your financial and legal advisors to verify it will serve your long-term financial goals. Take full advantage of the counseling sessions your lender is required to ask you to take so you know your options. For many clients, a reverse mortgage product offers the answers to ensure having sufficient assets to last a lifetime.