Here’s what you need to know.
If you’re of the mind that reverse mortgages are an inferior product, or worse – a rip-off, put aside this notion for a moment and consider some basics facts and history.
Accounting for over 95 percent of all reverse mortgages today, the dominant program is the HUD/FHA insured Home Equity Conversion Mortgage (HECM) reverse mortgage.
Established 30 years ago, the HECM was created to enable senior homeowners (62 and older) the ability to access a portion of their home equity without selling to support themselves in later years and age in place at home.
In those early years of HECM, inadequate regulatory oversight lacked sufficient education requirements. There were some who took advantage to sell seniors inappropriate products and services, and others lured them into fraudulent schemes. Since then, aggressive intervention from regulators, enforcement officials, and industry leaders have put numerous protections in place. Nevertheless, the reputational issues linger among the uninformed.
The U.S. government developed, insures, and continues support for this program which is specifically designed for senior homeowners.
Reverse Mortgage Misconceptions
The root cause of reverse mortgage cynicism emanates from [factual] ignorance and misconceptions. Understandably, the product is different and more complex than traditional mortgage loans. For many, the benefits may appear “too good to be true”, which rouses suspicion that is easily validated by the misinformation and misconceptions.
Moreover, too many professional advisors, who should know more, are among the uninformed that perpetuate the stigma. Additionally, past and ongoing press coverage has been predominantly negative as well as inaccurate and misleading. So, it’s understandable how confusion and suspicion abound.
Experience gained over the years resulted in a multitude of changes that thoroughly improved the value, safety, and sustainability of the program. These changes were implemented to protect the interests of borrowers, lenders, and the FHA Mutual Mortgage Insurance fund that guarantees the program’s sustainability and performance.
The FHA insurance is the foundational support that enables the HECM program to deliver its unique terms and protections to both borrowers and lenders.
Compared to a traditional (forward) mortgage or home equity line of credit (HELOC), HECMs have unique terms favoring senior borrowers. Salient features include:
- No monthly payments required. Voluntary payments are permitted with no pre-payment penalty.
- Credit line growth – the undrawn balance of the credit line increases continuously to provide more funds later to offset living cost increases.
- No maturity date – loan repayment not due until the home is sold or no borrower resides in the property and the loan remains in good standing.
- Non-Recourse loan – neither borrowers nor heirs incur personal liability.
- Loan repayment amount will not exceed the property value at the time of repayment.
- Funding amount established at closing – not affected if future property value declines
- Borrower obligations are limited to:
- Keeping real estate tax and property obligations current
- Performing basic maintenance
- Living in the property as primary residence
Fortunately, change has begun as research from retirement think tanks and academic institutions endorse the importance housing wealth can add if included in the retirement planning process. In fact, studies have established that, properly utilized, the inclusion of housing wealth in retirement planning has the potential to improve cash flow, increase liquidity, reduce longevity risks, and extend retirement security.
Enlightened financial and retirement professionals are recognizing this as an opportunity to lessen consumers’ primary anxiety – fear of running out of money in retirement. In a nutshell, that is the objective of the reverse mortgage. Clearly, housing wealth utilization should be a fundamental consideration in retirement planning. How it should be used is dependent on each individual’s circumstances and desires.
TO LEARN MORE
Consultation with a Certified Reverse Mortgage Professional (CRMP) is highly recommended to receive thorough and objective information about reverse mortgages, other options, and how to determine which, if any, may best fit your situation.
A complete list of CRMPs by state is available at the National Reverse Mortgage Lenders Association: https://www.reversemortgage.org/About-NRMLA/Certified-Reverse-Mortgage-Professionals