Michael Witte – Found on online.wsj.com
Reverse mortgages—they are the last thing that your clients would ever want, and they are the first thing they need as a last resort. Such are the opposing, yet surprisingly complimentary, views of what is still for many a highly controversial topic.
The National Foundation for Credit Counseling® (NFCC) reported in a March, 2014 survey that 71% of Americans are worried about their financial situation. You’ve seen the ads for the financial planning company who interviews an individual in a taxi worried about his financial future. The interviewee says he has a life expectancy of 24 years, but only enough retirement savings for 15 years. Even with these worries in mind, adults who are spending less than the previous year continues to decline from 57% in 2009 to 29% in 2014.
One consequence of worrying about making ends meet has been an increase in Americans over 62 taking out reverse mortgages. The number of reverse home equity conversion mortgage (HECM loans) made in each federal fiscal year peaked with the housing crisis in 2007-2009 in FY 2009 at 114,692. Loans fell off to FY 2012 at 54,822, but seem to be on the rise again. We are currently at or above last year’s 60,091.
What is a Reverse Mortgage?
“A reverse mortgage is a loan against home equity that doesn’t have to be repaid until you move, sell your home or die. You can receive a lump sum, a line of credit, monthly payments or a combination. To qualify, you must be 62 or older. (If the home is owned jointly, both owners must be at least 62.) The amount you can borrow is based on your home’s value, current interest rates and your age.”
To apply for a reverse mortgage was easy prior to 2015. But that is about to change for many, as new regulations go into effect in 2015 that will require individuals that opt for a reverse mortgage to have financial planner counseling.
It’s easy to Google and find the Pros for reverse mortgages, but not as easy to get the cons. The Pros can be listed as:
- You can stay in your own home and improve your finances, assuming you have equity in your home.
- It’s flexible. It can be tailored to your financial needs or financial planner’s recommendations
- Low risk of default. You must keep up with property taxes, upkeep and insurance.
- The money you take out is tax-free.
- The mortgage cannot exceed the value of your home.
- No restriction on how you use the funds extracted.
The Cons can be listed as:
- The mortgage rate is adjustable. Adjustable rate loans can be expensive if rates go up.
- There are high origination fees.
- There are no monthly payments, but the size of the mortgage compounds.
- The interest is not deductible
- The home will have to be sold when the mortgagees die.
- There may be no equity left for your heirs.
- The homeowner may get locked into keeping the house, when a better option would be to sell and move into more affordable housing.
- The homeowner may not keep up with property taxes, upkeep and insurance.
Here’s an example of a couple, both over 62 owning a home valued at $425,000 and two mortgages totaling 200,000. The maximum loan amount may be 48% or 204,000. That’s enough to pay off existing mortgages and save $2,000 in mortgage payments, but there would be little cash available. That would leave the couple with $24,000 in savings per year less property taxes, upkeep and insurance. That extra savings could mean the difference between just getting by and a comfortable retirement.
The reverse mortgage certainly is a viable option for some older Americans, especially if you are not considering moving. Others believe that a reverse mortgage is a little like a car airbag. It’s nice to know it’s there. But if it ever has to be used, the driver’s already in trouble.
Coal to Cash Homebuyers, Inc. is part of a nationwide group of thousands of investors who are helping tens of thousands of homeowners every year. We may not be the “traditional” route, but we CAN help and we can do it quickly!
Give us a call today at 805-426-9988 to let us know what YOU need help with!