Reverse mortgages have gotten somewhat of a bad reputation, often being seen as an irresponsible last option for people looking to resolve a financial situation. But as with many things, if used correctly and with the right tools, they can actually be a good option as another source of income during retirement. In order to qualify for a reverse mortgage, the applicant must be 62 years or older, have equity in their home, are able to pay property taxes, have homeowner’s insurance and are able to continue maintaining their home to a sufficient level.
Reverse mortgages have changed significantly in the last 10-15 years, especially since 2012. Although complicated, reverse mortgages (with the advisement of a financial planner) can be a viable option for many entering into retirement. Reverse mortgages (also known as the HECM program) is administered by the Housing and Urban Development Department and Federal Housing Authority. Since 2012, an attempt has been made to make reverse mortgages a more viable option. For example, to do away with the “irresponsible” reputation component, applicants for a reverse mortgage now have to undergo a more rigorous financial evaluation, hopefully deterring those who may be using a reverse mortgage as a desperate means. All borrowers must also go through counseling sessions, have an appraisal on their home by the FHA and the house must be their primary residence. After all of these qualifications have been met, the borrower may be approved for up to $625,500. If the borrowers are unable to meet these standards (if they no longer reside in the residence) the loan must be paid back. The approved loan is based on the value of the home, and can be paid in a lump sum, tenure payments, term payment, a line of credit or a modified tenure or term payment. But the borrower is never held to one payment and can apply to have the payment method changed if their financial situation happens to change.
Several myths have also been dismissed about reverse mortgages, such as that a spouse who was not on the mortgage may be kicked out of the residence upon the death of the mortgage holder or that the owner of the mortgage loses the title to the home when they sign on the dotted line.
What is not a myth though, is that high costs are still an issue. But as with many financial tools, shopping around to get a better rate can save the applicant money, as the initial costs for a reverse mortgage ranges anywhere from $2000 to $10,000.
A reverse mortgage is a non-recourse loan that is secured by collateral, which is usually property. If the borrower defaults or when the loan does eventually come due, the issuer can seize the collateral but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount.
So when is it ideal and responsible to use a reverse mortgage? There are four situations which come to mind:
- Using a reverse mortgage so that a retirement portfolio can continue growing.
- Using a reverse mortgage line of credit once their retirement portfolio is no longer available.
- Using a reverse mortgage to pay off an existing mortgage or to pay for necessary renovations (either because of the age of the house or need for more accessible accommodations).
- Borrowers can also use a reverse mortgage to help supplement retirement income, i.e. using the reverse mortgage tenure payment option instead of annuities to help delay Social Security benefits or to help pay off taxes (in the case of Roth conversions) or to fund long-term care insurance premiums.
As with most financial decisions, it is important to consult a competent financial advisor to see if this is a route that is worth taking and also to consider your own unique personal situation. Having all the tools in front of you, educating yourself and understanding your different options, is the best way to make sure that you are getting the most out of your retirement income.