Reverse Mortgages have a less than stellar reputation; in fact, many Americans, retired or not, continue to see the reverse mortgage as a “loan of last resort” or a loan to take out when there are no other options left. In fact, many Americans think taking out a reverse mortgage either means you are poor or uneducated because there is no way a financially savvy senior would even take out a reverse mortgage.
The truth about reverse mortgage, however, is something else entirely. The first hurdle is making sure a borrower understands the reverse mortgage and, most importantly, realize that the reverse mortgage is a way to use the untapped equity in the home they’ve paid for throughout their working years.
A recent article, published by CNBC, highlights how and why the reverse mortgage became a loan of last resort:
“The criticism of reverse mortgages is less with the product itself than with the way that people use them. ‘Free money’ has a tendency to encourage bad behavior — one reason the Federal Housing Administration requires borrowers to undergo a counseling session before entering a reverse mortgage contract. In other words, don’t use a lump sum payment from one of these to buy the Mercedes-Benz you’ve always wanted.”
A reverse mortgage should be a long-term retirement planning tool, and not just for cash strapped seniors, but for affluent seniors who have planned and saved for retirement. As with any financial product though, a borrower should know and understand their financial obligations, which include paying any and all maintenance on the property as well as keeping up with their property taxes and homeowner’s insurance payments.
Most importantly, a reverse mortgage is a flexible alternative to more traditional forms of retirement planning such as social security or 401ks or stocks and, with more Americans living a lot longer than ever before, flexibility is key.
For example, if the stock market has taken a downturn, it may be time to pull funds from the reverse mortgage line of credit in order to sustain retirement expenses while the market stabilizes. Another example may be to set up monthly reverse mortgage payments to help supplement social security payments and cover retirement expenses.
These are just two of the ways reverse mortgages can adapt to a retiree’s situation, not just at 62, but also at 72 or 82. For example, a potential retiree may be saving at 62 for retirement but may need more cash flow at 72 as they adjust to their new needs and wants. At 82, fixed expenses may be set and monthly payments may be more attractive than they were at 72.
Point is, things change, and so do retirement needs and a reverse mortgage is a way to, not only sustain retirement but also ensure that it is secure and worthwhile.
Give us a call at (888) 845-6630 to speak to one of our brokers or email us at info@PSReverseMortgage.com. A reverse mortgage calculator is great to get started but it’s the personal touch that matters.
The reverse mortgage was a created to help retirees stay in their home without the need to keep up with monthly mortgage payments at a time when cash flow might not be optimal. In addition, borrowers who also owned their homes free and clear could tap into the home equity they accumulated throughout their working years and leverage it during retirement.
Something happened along the way that increasingly painted reverse mortgages in a negative light and, suddenly, a financial product that was created to help seniors became the “most misunderstood mortgage” there is. Even more confounding is the fact that many financial experts and academics find “no rational reason” why many older homeowners remain hesitant to tap into their home equity.
A recent article in Reverse Mortgage Daily interviewed Steven Sass, a research economist at Boston College’s Center for Retirement Research, about the familiar behavioral roadblocks many retirees have about the reverse mortgage and the financial industry in general.
At the top of the list is a fear of getting into debt late in life and the satisfaction that comes with owning a home free and clear. These are two things that are not inherently bad but can cause problems for future retirees.
For example, the article mentions the fact that Social Security may be non-existent in the future and newer generations are saving less and less so where do future seniors obtain cash flow for their retirement needs: the equity in their home. Equity is a funny thing, many people don’t think about it until they need it but it’s an important source of cash flow. More importantly, it’s an option to supplement income and diversify assets in an ever-changing environment.
In a perfect world, a homeowner takes out a reverse mortgage line of credit at 62 and lets it grow, untouched, as a “rainy day” fund for the future but, like equity, many homeowners don’t think about the reverse mortgage until it is necessary and, by then, it may be too late.
“If you have a sufficient income to cover your expenses, is there any great need to go out and secure this line of credit or get the money?” Sass asked rhetorically. “So I think people might need some impetus to use a reverse mortgage.”
Why I Started PS Financial Services
I was in training at one of the country’s largest reverse mortgage companies when the CEO said, “We don’t want every loan.” What he meant by this was, “We will deny the less than perfect borrower and/or property.”
I had difficulty with this concept because I was a front line mortgage loan originator (MLO) who put food on the table by closing every loan possible. I was working hard to bring in that business and help those families in less than ideal situations.
I’ve also helped change people’s lives: people who ran into some type of hardship in retirement whether it be physical, financial or both. Helping these people get out of their situation was incredibly fulfilling and I would fight with all my might to help them get their reverse mortgage.
Now this CEO was telling me I would have to look these retirees in the eye and tell them we can’t help them.
I wasn’t having it.
An Innovative Way to Pay Off Your Mortgage (and Plan For Retirement)
When I speak to clients for the first time, they often tell me one of the reasons they never considered a reverse mortgage is because they do not currently have a mortgage.
I let them know, off the bat, that while the reverse mortgage was created as a way to help seniors pay off their mortgage, that facet of the program is only the tip of the iceberg. The reverse mortgage, while not well known for its flexibility, is one of the most flexible mortgage programs around.
If a borrower has a need or simply wants to pay off their mortgage, then they can, and any left-over funds can be stored in a line of credit or can be received via monthly payments for a set amount of years or for life (as long as the borrower lives in their primary residence).
However, the reverse mortgage can also be used as an innovative long-term retirement planning tool. This is the part where many borrowers and their heirs find themselves at a loss because many continue too look into the reverse mortgage (MAINLY) as a loan of last resort when it is, in fact, an innovative way to plan for your retirement and/or pay off your mortgage.
How Much Can a Borrower Receive With a Reverse Mortgage?
That is the question a lot of clients seeking information about the reverse mortgage first ask.
In truth, while how much a borrower can receive is an important question, there are many other things that should be considered before giving numbers to potential clients.
This is the difference between speaking with a flesh and blood broker and punching information on a website calculator and hoping to get an exact amount.
One of the misconceptions consumers have about website calculators is that they will give you accurate numbers. In addition, many think that the reverse mortgage is not for them after looking over numbers in a website calculator.
I can’t stress this enough: a calculator is not an accurate representation of the variety of options available using a Reverse Mortgage Loan. A calculator typically only offers one blank program (that may be a more or less accurate representation of the typical reverse mortgage borrower) but it does not, by any means, mold to every borrower’s specific situation who may be looking into getting a reverse mortgage.
History of the REVERSE MORTGAGE
- The Reverse Mortgage (RM) first started in Great Britain.
- 1961: The first reverse mortgage in the U.S. was done by Nelson Haynes of Deering Savings and Loan for Nellie Young of Portland, Maine because she wanted to stay in her home despite the loss of her husband’s income. This reverse mortgage, however, was not insured.
- 1983: The first congressional hearing regarding reverse mortgages takes place. The Senate approves a proposal to insure reverse mortgages through the Federal Housing Administration.
- 1988: The program was re-introduced by President Ronald Reagan with FHA insurance.
- 1989: The first FHA-insured HECM loan was done for Marjorie Mason of Fairway, Kansas.
Planning for Retirement the Smart Way…With a Reverse Mortgage Loan
The recent announcement of the financial assessment, which is to be implemented on March 2015, has sprung a slew of news stories describing the potential benefits and risks of the reverse mortgage loan.
Despite the fact that positive press was up in the months of June and July, there is still a negative stigma associated with the reverse mortgage, and I am not talking about the fear of losing your home this time. In fact, what called my attention in the article, Reverse Mortgage Loans: Are they worth the risk?, was something else: closing costs.
Reverse Mortgages Loans Can Help Seniors Retire Comfortably
The most difficult part of educating seniors and their caregivers about the reverse mortgage is the fact that they have heard and/or read so many negative news that they cannot fathom any positive news about the reverse mortgage loans.
In a sense, it seems impossible to them that any positive can ever come out of the reverse mortgage. Thankfully, the tide of change is coming swiftly for the NEW reverse mortgage program, where, not only is the reverse mortgage industry poised to benefit from, but seniors, their caregivers, their heirs, their financial planners, etc. as well.
For example, let’s say a couple did everything right in order to make it a comfortable retirement, however, their mortgage payment is higher than they ever imagined and burning a hole in their pocket every month.
A reverse mortgage is a potential avenue for seniors whose monthly mortgage payment has been unmanageable and would rather put their monthly income to better use than their mortgage payments, especially if they have already retired (probably later than expected).
Age is an Increasingly Important Factor in Retirement Planning
More than ever, age is quickly becoming an important factor in long term retirement planning. Baby boomers are living longer currently than any other generation that came before (and that’s without getting into generations that plan to retire 30+ years from now.
The ideal retirement age is no longer 62 but 65 and is poised to become 70 in the next decade. By 2050, the number of Americans that will be 65 years of age and older is projected to be 88.5million, more than double the 2010 population of 40.2 million.
According to an article in Reverse Mortgage Daily, Raymond James Financial launched a new retirement planning initiative that will give advisors the tools to help them respond appropriately and effectively to older clients if and when they need help down the line.
Using a Reverse Mortgage for Changing Retirement Plans
The reverse mortgage is still a viable option for seniors hoping to pay off their mortgage and continue to live debt free during retirement, but very few take advantage of it.
In fact, according to a nationwide survey, presented at the National Reverse Mortgage Lenders Association by Dan Gorin, only 2% of seniors 62 years of age and older actually get a reverse mortgage.
This means less than half of those who consider a reverse mortgage in the first place are actually getting one.