Reverse mortgages are getting a second look and not just from the 70+ crowd. With the tough economy, Boomers age 62-64, currently represent one-in-five prospective borrowers of reverse mortgages, which were once associated with a much older age group, according to a new study, Changing Attitudes, Changing Motive: The MetLife Study of How Aging Homeowners Use Reverse Mortgage, produced in conjunction with the National Council on Aging.
Home Equity Conversion Mortgages (HECM), best known as reverse mortgages, are special types of home loans that allow people to draw on home equity without monthly mortgage repayments. Instead of the homeowner making payments to the lender, they receive money from the lender. They can be used for a variety of purposes, to pay for home care or to enable people to stay at home longer, for example. These mortgages have evolved into a way for many people to help manage urgent financial needs, including lowering debt. Home equity is also being viewed as part of a holistic retirement plan, says Sandra Timmerman, director of the MetLife Mature Market Institute.
The amount you can borrow depends on your age, you must be at least 62, the current interest rate, and the appraised value of your home or FHA's mortgage limits in your area. Generally, the more valuable your home, the older you are, and the lower the interest rate, the more you can borrow, says Thomas Fox, community outreach director for Cambridge Credit Debt Counseling.
For all the growing use of them, reverse mortgages can be complicated and misunderstood. Much homework is required before you turn to a reverse mortgage as a retirement rescue.
What you need to know
You get a stream of income. This can give you breathing room so that you can reduce or defer withdrawals from your investments, or postpone higher Social Security distributions for permanently higher benefits beginning at a later date, says Constance Stone, president of Stepping Stone Financial.
You can't outlive a reverse mortgage. “Unless you permanently move out of the property, the loan generally does not have to be repaid until the last surviving homeowner passes away. In the event of death, or if the home ceases to be your primary resident for more than 12 months, the homeowner's estate can choose to repay the mortgage, or put the home up for sale,” explains Peter D'Arruda, president of Capital Financial Advisory Group. If the sale of the home is not enough to pay off the reverse mortgage, the lender must take a loss; other assets will not be used to pay off the balance. Heirs also keep any extra profit after the home is sold, says D'Arruda.
Reverse mortgage loan advances are not taxable, and generally don't affect your Social Security or Medicare benefits, says Fox.
While a reverse mortgage can be a lifesaver, there are plenty of considerations. “Closing costs can be high. The person would have to live several years to recoup closing costs,” says Stone.
Then too, with recent changes, including lower loan limits, the introduction of a fixed-rate HECM, and a new loan option HECM Saver, reverse mortgages are no longer a one-size-fits-all solution, says Timmerman. Know what you're getting and grasp how it works.
Although borrowers need to pay off existing debt on their homes to get a reverse mortgage, by transferring this debt to the reverse mortgage loan obligation, they are only deferring the repayment of these mortgage payments (with interest) until they die or move out. Borrowers must also meet all of their other reverse mortgage obligations, including making timely property tax and homeowners insurance payments, says Timmerman.
Based on your experience with conventional loans, you might believe a a fixed rate is preferable to an adjustable rate reverse mortgage. But a fixed rate reverse mortgage can be more costly and potentially offers less flexibility than an adjustable rate reverse mortgage, points out Timmerman.
Traditionally, the home represented a very significant source of inheritance for the next generation. If the house needs to be sold in order to payoff the reverse mortgage that changes things dramatically. “There is significant impact on the inheritance you will leave to your children,” says John Hauserman, author of RetirementQuest: Make Better Decisions.
What's the bottom line? A reverse mortgage, says Stone, is probably not best suited for someone or a couple who has a short life expectancy or a high probability of leaving the home in one to four years. Those without children or children who don't need the inheritance and those who have no other income options, might also be strong candidates, according to Hauserman.
Quite simply, says Timmerman, “For older homeowners with sizable debt, a reverse mortgage may be the only way they can retire.”