John and Mary grew up during the depression era; John had an 8th grade education and Mary had a high school education. Both of them were hard-working and although they did not have high paying jobs, they were able to build a future for themselves and purchase a home where they raised their family. As retirement approached, their main asset was their home, which they owned outright. After looking at their options, they decided to consider a reverse mortgage to help fund their retirement.
According to National Mortgage News, seniors’ aged 62 and up hold $6.6 trillion dollars in equity, and since seniors tend to age in place, a reverse mortgage can make sense for some.
There are a lot of myths and misunderstandings about how reverse mortgages work. I’m the first to say that I am NOT a reverse mortgage expert, but I’ve had enough people ask me about them, that I want to share the basic information with you today. Reverse mortgages can be complicated, so you should always get a financial professional’s advice if you are considering one.
Reverse Mortgage Explained
The simplest explanation is that a Reverse Mortgage allows seniors (aged 62 and older) to take out a mortgage loan based on the equity in their home and receive monthly payments or a lump – sum payment. This is typically used to supplement their retirement income.
How a Reverse Mortgage Works
A Reverse Mortgage loan is different than a traditional mortgage loan, with a traditional mortgage your debt will fall over time and your equity in the home will rise. It’s opposite with a Reverse Mortgage, over time, your equity will fall and your debt will rise.
After your home is appraised, a Reverse Mortgage will give you a loan in the amount of a percentage of the home equity in your home, however, it will not be 100%, because this loan is a non-recourse loan. This means that you will never owe more than the appraised value of your home, even if your home loses value after you get your Reverse Mortgage. Current interest rates and the youngest borrower’s age is also taken into account.
You can receive the Reverse Mortgage loan amount as a lump sum or as monthly payments. You will not be required to make any further payments, however, the loan will be accruing interest. You will also be responsible for maintaining the home, paying property taxes, and home insurance. In some instances if you have an outstanding mortgage, the reverse mortgage company will pay off your outstanding balance therefore saving you the cost of your monthly mortgage payment. The loan is repaid when you pass away or sell your home. Any remaining equity will go to you or your heirs.
Reverse Mortgage Stabilization Act of 2013
Prior to 2014, the Reverse Mortgage industry was a bit like the Wild West. There were not a lot of laws and regulations about what companies could do when setting up a Reverse Mortgage. In 2013, Congress passed the Reverse Mortgage Stabilization Act of 2013 which made the Reverse Mortgage Industry much more consumer-friendly by directing the FHA to establish additional rules to improve the fiscal safety and soundness of the program.
When thinking about their future retirement, most people plan their retirement income to consist of maximizing their Social Security benefits, pension plan, and retirement savings. However, some seniors, like John and Mary, need an additional way to supplement their income as well and see a Reverse Mortgage as a viable option. If you are considering a Reverse Mortgage, you should meet with a professional to look at your specific situation and all your options; this is not a decision to make in a vacuum.
Premier Planning Group is an independent firm with securities offered through Summit Brokerage Services, Inc. Member FINRA www.finra.org and SIPC www.sipc.org
Opinions expressed are that of the author and are not endorsed by the named broker dealer or its affiliates. The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. Neither Summit Brokerage nor any of its affiliates may give legal advice. For a comprehensive review of your personal situation, always consult your legal and estate advisor. **Mortgage lending services are not provided, endorsed or warrantied by the firm.