What every senior and their family should know about reverse mortgages will be covered in this week’s column. I asked a good friend of mine, a mortgage broker specializing in reverse mortgages, to provide some insight into this type of mortgage. This is what we came up with. However, before you act on this or any other mortgage please seek a trusted professional for specific advice to determine if this is best for you.
Reverse mortgage commercials featuring memorable television celebrities are popping up on TV during favorite daytime gameshows or late at night in between infomercials. While many mature Americans are open to using home equity to assist in retirement planning, many seniors watching these commercials have a general perception that reverse mortgages are a bad deal and never think twice about investigating the government insured program designed for seniors over the age of 62.
Starting in the early 80s, the term reverse mortgage or reverse annuity mortgage started getting a very bad rap, and for good reason. But what most American seniors don’t know is how the reverse mortgage programs of years ago are obsolete and the new reverse mortgages of today are poles apart with regulations and improvements from the “old style” reverse mortgages. When Ronald Reagan signed a bill allowing Federal Housing Administration to insure the “Home Equity Conversion Mortgage,” changes and safeguards would start shaping the new program with the biggest and best changes to the program happening in the last few years. For the most part, there are still many misconceptions and a lot of confusion surrounding the Home Equity Conversion Mortgage of today.
The Home Equity Conversion Mortgage is a Government Insured program that is regulated by HUD and allows seniors over the age of 62 to tap into the equity built up in their home and use the tax-free cash to improve their lives while they are alive and living in the home. One of the biggest advantages of this program is that the lenders do not require a monthly mortgage payment from the senior until a maturity event such as selling the home, moving out or all borrowers have died. However, the borrower is required to continue making any property charges such as property taxes, homeowners insurance or HOA dues. The program has been most popular with seniors that have a financial need and a desire to stay in their home. The old saying, “I’m only leaving this place feet first!” may sound dreary but it is often the exact frame of mind that puts seniors in a position of spending their equity instead of leaving it to their heirs.
The idea of spending equity in the seniors’ home is somewhat of a hot topic. Most seniors have the desire to leave a legacy including wealth to their children when they pass away. However, with inflation, diminishing pension plans and rising medical care cost including prescriptions, many retired seniors are faced with a tough decision of going back to work or using the one asset they have, which is home equity. Another option of selling the home and living off the cash is still available, but often has psychological effects as well as the possibility of still out living their money. The Home Equity Conversion Mortgage is becoming a very popular tool in the senior’s retirement planning.
Let’s look at a couple of the most recent changes made to the reverse mortgage program as discussed earlier. The biggest change to take shape in 2014 was the financial assessment regulations. These changes required lenders to financially assess and qualify recipients of the reverse mortgage which had never been done previously when applying for a reverse mortgage. While many groups complained about these changes (including the lenders and banks originating these loans), there were significant advantages of this new ruling. Some reverse mortgage recipients never should have been able to take out the Home Equity Conversion Mortgage. The reason was simple, these particular homeowners could not afford the property taxes and or homeowners insurance on the property.
If a borrower cannot afford the property charges and gets behind on the property taxes or fire insurance policy, the lender is required to foreclose on the home unless the borrower can negotiate a payment plan or bring the charges current. This resulted in a senior being forced to move from the home in some cases. A reverse mortgage recipient should only take out a reverse mortgage if they can afford to pay property taxes and insurance and also afford food, utilities and other common necessities. If these fees are too high, selling and downsizing may be the better option. This is one reason why reverse mortgages are not right for everyone.
Another change was the “Non-Borrowing Spouse Rule.” This new regulation allows couples with one borrower younger than 62 the ability take out a reverse mortgage while ensuring the younger spouse can stay, living in the home even if the older borrowing spouse died. In years before this rule change, these couples could have been put in a situation where the younger spouse was faced with having to move out and pay the loan off as it became due and payable upon the death of the older borrower. This was another very positive rule strengthening the program while protecting younger surviving spouses from losing their home.
Yes, you may see more and more reverse mortgage ads on TV and radio or even social media. However, don’t throw the baby out with the bathwater just yet. Educate yourself on the pros and cons of this program and then make your own decision based on facts and not myths.
Call us today, (951) 296-8887 and get the information you need enabling you to make an informed, educated decision. Questions regarding available inventory and/or other real estate matters please contact, [email protected]. Mike Mason, Realtor® & Broker/Owner of MASON Real Estate. LIC: 01483044, Temecula Valley resident for 30+ years, Board of Director (since 2011) Southwest Riverside County Association of Realtors® (SRCAR).