How Savvy Homeowners Use Reverse Mortgages to Increase Financial Security – Others Not So Sure
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Financial advisors, recognizing the need to increase retirement funding, are promoting the versatility and innovative solutions provided by reverse mortgages to make use of home equity. However, a legacy of misinformation and old myths prevails that continues to misguide the beliefs of some.
By George A. Downey
Mark Twain could have been talking about reverse mortgages when he wrote: “It’s not so much what they know or don’t know – it’s what they absolutely know for sure that just ain’t so!”
Often disparaged and misconstrued, the HUD/FHA insured Home Equity Conversion Mortgage (HECM) reverse mortgage was created to help aging homeowners utilize a portion of their home equity (housing wealth) to increase financial security. The HECM terms, uniquely designed to bolster retirement finances, are often misunderstood and thought to be inappropriate. That is changing as more financial advisors and homeowners are enlightened and learn the facts.
| HECM FACTS VS. FICTION | |
| FICTION | FACT |
| Bank owns the home—borrowers must transfer title to the lender | Borrowers never give up ownership |
| Loan of last resort—only suitable for those who are desperate or not eligible for traditional financing. | A valuable financial resource to increase access to cash and extend retirement security without monthly payment obligations. |
| Home must be owned free and clear to be eligible | Most borrowers use proceeds to pay off existing mortgages and eliminate payment obligations |
| Loan costs are significantly higher—lenders charge excessive fees | FHA regulates costs, which include standard loan costs + FHA insurance premiums. Lenders cannot charge excessive fees. |
| If the loan balance grows to exceed the home value, the borrower or the estate is liable for the difference | Reverse mortgages are non-recourse loans— neither the borrower nor the estate will ever owe more than the property value at the time of repayment. |
| Funding can be reduced or frozen if/when financial or real estate markets decline. | Access to funds and loan terms are guaranteed by FHA insurance—can never be changed as long as loan remains in good standing |
Reverse Mortgage Benefits
- No monthly payment obligations – prepayments are permitted without penalty but not required. Monthly charges are deferred and accrue.
- Credit line growth – the undrawn balance of the credit line grows (compounding monthly) at the same rate charged on funds borrowed.
- No maturity date – repayment not required until no borrower resides in the property.
- Non-Recourse loan – neither borrowers nor heirs incur personal liability. Repayment of loan balance can never exceed the property value at the time of repayment. If loan balance exceeds property value at time of repayment the lender and borrower(s) are protected by FHA insurance.
- Access to funds and loan terms are guaranteed – cannot be frozen or cancelled as long as the loan remains in good standing.
- Borrower obligations (to keep loan in good standing) are limited to:
- Keeping real estate taxes, liability insurance, and property charges current
- Providing basic home maintenance
- Living in the property as primary residence
To Learn More
While reverse mortgages offer valuable and distinctive benefits, they are not suitable for everyone. To determine if one could be a good fit, consult a Certified Reverse Mortgage Professional (CRMP). Extensive information about reverse mortgages and a list of CRMPs is available at www.ReverseMortgage.org, the website of the National Reverse Mortgage Lenders Association, Washington, DC.
About the Author. George Downey, CRMP, (NMLS 10239), is the CEO and founder of Harbor Mortgage Solutions, Inc., Braintree, MA, a mortgage broker licensed in Massachusetts (MB 2846), Rhode Island (20041821LB), NMLS #2846. Questions and comments are welcome. Mr. Downey can be reached at (781) 843-5553, or email: GDowney@HarborMortgage.com
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