Are you a senior or veteran considering a reverse mortgage? Specialists on the topic offer their advice on the program that allows those 62 years and older to convert part of the equity in their homes into cash.
Robert Trommler, an expert in the reverse mortgage industry for the last 13 years, enjoys educating older adults about reverse mortgages.
“I have so often seen it change people’s lives,” said Trommler.
However, the single most common disappointment he has faced is seeing seniors that won’t consider this option because they don’t understand it.
“They refuse to get informed and educated about how this option could work because of fear or inaccurate information or urban myths they have heard about the loan,” said Trommler, branch manager at HighTechLending Inc., the second largest originator of reverse loans in California and the seventh largest in the nation.
The reality is that these loan programs can be a remarkable, safe and responsible way for senior or veteran homeowners to have a much more enjoyable retirement with more financial dignity, Trommler said.
“We encourage people to do their homework and to make wise decisions based on facts and truth, not on heresy, myth, and rumor,” he advised.
Since HUD began regulating and standardizing the loan program in 1989, the loan has gone through a progression of changes and improvements, with the steady objective of protecting borrowers, regulating lenders and ensuring the long-term viability of the loan, Trommler noted.
“Since the loan’s primary qualification is age related – minimum of 62 – the loan is offered to senior homeowners, including veterans, that can demonstrate sufficient equity and income to meet the program guidelines,” Trommler said.
Reverse Mortgage Loans on the Rise for Seniors and Veterans
At HighTechLending Inc., the year 2017 is “off to a record start” for new loans, with 12,467 closed transactions for veterans and non-veterans 62 years and older.
“The year-to-date total for 2017 is one of the quickest and largest starts our industry has seen over the past decade,” Trommler said. “We are hopeful this trend will continue.”
Comparatively, there were 79,106 closed transactions in the year 2010; 73,131 in 2011; 54,822 in 2012; 60,091 in 2013; and 51,642 in 2014.
“The reduction in closed loans from 2010 through 2014 was probably a result of lower home values, as experienced nationally, during that time,” Trommler explained. “Lower home values would translate into fewer applicants being approved for the loan in accordance with HUD guidelines.”
Benefits of Reverse Mortgage Loans for Seniors and Veterans
The advantages and benefits of the program are identical whether a borrower is a veteran or a non-veteran, Trommler said.
Here’s his advice on the most common uses and benefits of the loan:
1. Paying off or eliminating an existing mortgage with the reverse mortgage proceeds so the borrower can remain in their home and can redirect those funds to whatever purpose they desire.
2. Using the funds to pay for the care of a loved one, family member or spouse.
3. Using the funds for a home remodel or repair projects to ensure the property meets the borrower’s long-term needs.
4. Using the loan funds to assist family members with college tuition, debt reduction, and home purchase projects.
5. Becoming a donor to charities, churches or colleges, which can result in a tax deduction being made with tax-free funds.
6. Using the loan funds to delay the start of Social Security payments, which can result in a lifetime “lift” in the amount of those payments.
7. Using the loan funds to pay for long-term care insurance or placing funds in the line of credit option as a source of emergency funds to cover a senior care event if insurance isn’t available or already in place.
8. Using the “purchase” version of the loan to buy a property and take a title with no monthly payment due. This is considered a very popular strategic use when seniors want to downsize their home.
What Are the Downfalls Reverse Mortgages?
“A reverse mortgage is a way of spending down one's home equity in retirement without having to leave one's house,” explained Jared Barton, assistant professor of economics at California State University Channel Islands in Camarillo, Calif. “If you do a quick Google scholar search, you'll find that finance and economics professors puzzle over why this is not more popular.”
Like most financial decisions, Barton is hesitant to offer “one-size-fits-all” advice.
“But one thing that high-quality research has indicated is that homeowners who pursue reverse mortgages often fail to plan for property taxes and insurance, thus putting themselves at considerable financial risk,” Barton said.
A reverse mortgage program is simply a financial tool, Trommler said.
“It is a well designed and highly regulated government program through an association between HUD and FHA,” he said. “It has no inherent downfalls but it is important that applicants and borrowers have a clear understanding of how the loan works and when to use it suitably and appropriately.”
The loan actually uses home equity to “cover” what would have been a borrower’s monthly payment, and the unpaid balance due on the loan increases over time as a result, Trommler explained.
“This causes a reduction in retained home equity which is the reverse of a conventional loan,” he said.
Reverse Mortgage Pros and Cons
Remember, the reverse mortgage is designed to create additional cash flows to keep the person in the home, said Harry Starn, director of the financial planning program at California Lutheran University in Thousand Oaks, Calif.
“For example, it works well for the person who needs another $1,000 of income to stay in the home,” Starn said. “It doesn’t work well for the person wanting to withdrawal large amounts for major expenditures.”
According to Starn, here’s a list of pros and cons associated with reverse mortgages:
Reverse Mortgage Pros:
HECM Availability: HECM is generally available to any homeowner – without a mortgage or small mortgage with substantial equity – who is age 62, not delinquent on federal debt, and able to maintain property and property tax/insurance payments.
Reverse Mortgage Guaranteed: The reverse mortgage won’t be canceled or frozen, which can happen with a home equity loan.
No Loan Repayment Until Person Leaves Home or Sells: The homeowner is not expected to make loan repayments, which occurs with a home equity line of credit.
Choice of Withdrawals: The types and frequency of draws are broad, including monthly payments for life and lump sum draws.
HECM Line of Credit Grows: The line of credit grows 3 to 5 percent per year, guaranteed.
Home Ownership: The borrower still owns the home. The lender just has a lean on the amount of the loan plus interest.
Creates Cash Flow Possibilities: For example, the homeowner might take out a reverse mortgage at age 65 or 66, take draws for living expenses, while allowing Social Security benefits to build up. Once the person reaches age 70 and a half, the reverse mortgage income might be stopped and delayed Social Security payments begin.
Reverse Mortgage Cons:
Cost of Acquiring a Reverse Mortgage: The cost can range from $7,000 to $12,000, however, the cost is not set in stone. Reverse mortgage lenders charge different rates, so it is worth talking to more than one lender.
Home Sale Trigger: If the person is out of the home for over six months due to living in a full-care nursing facility or other factors, a home sale is triggered. However, if the person can come back and live in the home for even one night, then the six-month clock starts again. Other triggers include failure to maintain the property and failure to pay property taxes.
Reduced Estate for Heirs: The sum of loan and interest is a liability to the estate, which will reduce the legacy. However, heirs can pay back the loan rather than put the home up for sale.
Cap on HECM Line of Credit: Regardless of the fair market value of the home, there is a maximum loan amount established by HECM, which depends on geographic location and appraised value.
Source of the Reverse Mortgage: Starn tends to recommend looking at only FHA-backed reverse mortgages for seniors – HECM – because you know what you are getting. If the person goes to a non-governmental lender that is offering some reverse mortgage product, then there must be due diligence to understand the loan agreement.
Reverse Mortgage Can Help with Retirement Goals
Before the reverse mortgage became available, borrowers and financial planners had a set of financial “building blocks” to use for retirement planning, Trommler said.
“These usually included Social Security, pensions, and savings or investment accounts,” he said.
With the advent of the reverse mortgage, this now added an important element to these available blocks: home equity.
“But the loan did so while not adding to the home owner’s monthly debt payments,” Trommler said. “It actually reduced these payments and accomplished this while retaining ownership and title to the property.”
In retirement, an existing mortgage can look like an adversary to a homeowner because it demands to be paid monthly or their home is in jeopardy, he noted.
“The reverse mortgage ‘flips’ that relationship so the home can now become their partner in meeting their retirement goals and objectives,” Trommler said.
When Considering a Reverse Mortgage Seek Expert Advice First
For seniors and veterans considering a reverse mortgage, Joe Conrad, a senior retirement planner at Skyline Home Loans in Southern California, suggests dealing with a member of the National Reverse Mortgage Lenders Association, or other educated experts on the topic.
“They should know that they can have a better quality of life if they access the equity in their home,” Conrad said. “I call it the ‘Swiss Army Knife’ of retirement planning.”
Time to Recap
A reverse mortgage for seniors and military veterans 62 years and older allows them to convert part of the equity in their homes into cash.
Benefits include the ability to pay off an existing mortgage or using the funds for a home remodel.
Possible cons include the cost, which could range from $7,000 to $12,000; or a home sale trigger if the homeowner is out of the home for six months, due to factors like living in a nursing care facility.
Anyone considering a reverse mortgage should seek expert advice before proceeding.
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