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Financial advisors use reverse mortgages to bolster income and financial plans

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Reverse mortgages now recognized as a financial planning resource that can increase and extend financial security for older homeowners.

by George A. Downey

Simply stated, reverse mortgages enable older homeowners the ability to convert a portion of home equity to cash or a credit line under unique terms that facilitate aging in place.

Originally designed for lower income households in 1989, which it still serves, the program has undergone significant improvements over the years. In addition to numerous enhancements and consumer protections, the program has expanded to serve more affluent homeowners. In so doing, it has emerged to become a basic financial planning tool that incorporates home equity into the financial planning process. 

Now may be an ideal time to integrate a reverse mortgage into a retirement income plan as home prices have reached all-time highs, and the prospects for economic stability are increasingly questionable.

In fact, economic decline may be underway. Runaway inflation, skyrocketing interest rates, and supply chain disruptions are among the numerous causes creating turmoil in the U.S. and international financial markets. The severity and longevity are unknown, but financial experts agree it will be significant and long lasting.

The problem is especially critical for people in or approaching retirement as they depend on savings and retirement income to survive. Since the beginning of 2022, unprecedented increases in fuel and living costs, along with financial market declines, are depleting retirement savings at alarming rates. 

The duration of financial market declines and recovery is unknown. What is known, however, is that seniors do not have time on their side to recover losses. Their priority now is to protect what they have, reduce risk, and maximize the utilization of all resources available. 

Home equity – A resource to protect savings and increase financial security.

For the great majority, the home is their largest asset, but can’t be used until it is sold or borrowed on. For those who wish to age-in-place and not sell, borrowing is the only option. Fortunately, home prices have risen to record levels in the past two years. Unfortunately, rising interest rates and more restrictive borrowing requirements have made traditional mortgage and credit line financing more challenging and less suitable. A better solution may be a reverse mortgage.

Reverse Mortgage – A unique resource that converts illiquid home equity to cash or credit.

Older homeowners (60 and older in Massachusetts) may be eligible to refinance to a reverse mortgage that defers all payment obligations permanently. No repayment is required until the homeowner sells or no longer resides in the property.  Depending on individual circumstances, all existing liens are paid off eliminating current payment obligations.  Further, additional funds or a line of credit will be made available for any surplus.  

The HUD/FHA insured Home Equity Conversion Mortgage (HECM) reverse mortgage is the dominant program nationally, accounting for over 95 percent of all reverse mortgage programs.  HECM property value limits are currently $970,200. Higher valued properties, and larger loan amounts, may be better served by new proprietary or jumbo programs.

Massachusetts – Jumbo Reverse Mortgages Now Available

The Massachusetts Division of Banks approved new proprietary (jumbo) reverse mortgages for Massachusetts homeowners.  These programs enable loan amounts up to $2,000,000 and provide terms substantially similar to the federally insured HECM.

Massachusetts Condominiums – New Developments

Until recently, reverse mortgage financing was only available to MA condominium projects that were fully approved by the Federal Housing Authority (FHA).  As a result, only 8 percent of all MA condominium projects have been approved, leaving 92 percent ineligible.  Recently, two significant changes occurred expanding and simplifying reverse mortgage financing for MA condominium owners.

  1. FHA Single Unit Approval.  This process enables HECM reverse mortgage financing with simplified and limited FHA approval required – eliminates the complications of FHA full project approval.
  1. New proprietary (jumbo) reverse mortgages. The MA Division of Banks approved these programs in February, 2020. Now, reverse mortgage loan amounts up to $2,000,000 are enabled for homes and condominiums without the previous requirement of FHA project approval.

Reverse Mortgage Benefits/Obligations

  • 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, borrower(s), and heirs are not responsible for the deficiency as they are protected by FHA insurance.
  • Access to funds and loan terms are guaranteed – cannot be frozen or cancelled as long as borrower obligations are maintained.
  • 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

Get the facts and determine if, or how, the various options to utilize housing wealth may enhance your individual needs and circumstances. For more information, visit the National Reverse Mortgage Lenders Association (NRMLA) website www.ReverseMortgage.org, or contact Harbor Mortgage Solutions, Inc. for a private consultation.

George Downey, CRMP (Certified Reverse Mortgage Professional), (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

Photo credit: istock.com/ronniechua