In his book “Understanding Reverse”, reverse mortgage industry trainer and Certified Reverse mortgage Professional Dan Hultquist breaks reverse mortgage borrowers into three overlapping categories:
- Those who have an immediate need.
- People who want to enhance their lifestyle.
- Those who use a reverse mortgage as part of their overall financial plan.
****I highly recommend that you purchase a copy of Dan’s very informative book at: https://understandingreverse.com/.
In this article, I want to break these categories down for you and give you examples of each category. However, before I do that, I want to explain what a reverse mortgage is and just a bit about how it works.
What is a reverse mortgage?
Most reverse mortgages are insured by the Federal Housing Administration (FHA) so that is the program I will be focusing on for this article. The name of the FHA insured reverse mortgage program is the Home Equity Conversion Mortgage (HECM).
The HECM is specifically designed for people age 62 and older that allows them to convert a portion of the value of their primary residence into spendable cash without required monthly principal and interest payments. Since the home stays in the name of the homeowners, they are still required to pay their property taxes and homeowners insurance, as well as maintain the home, live there as their primary residence and keep their names on title.
As long as these requirements are met, they never have to make a monthly payment and can never be forced out of the home. The loan only comes due when the last homeowner, or non-borrowing spouse, permanently leaves the home.
Please do not think of this as free money. We all know there is no such thing as something for nothing. The homeowners are charged interest on the money they use. However, since no monthly payment is required, the interest that is being charged is added to the loan balance. This is a negatively amortized loan meaning that the loan balance increases over time instead of decreases.
It is very important that the homeowners understand this concept and I spend considerable time making sure my customers do understand.
Now, let’s discuss some of the reasons people get a reverse mortgage.
1. People who use a reverse mortgage for an immediate need.
An immediate need is something the homeowner needs now. This could be as simple as paying off an existing mortgage on the home because they were forced to retire earlier than expected. It could also be an important home repair or paying for medical needs.
Quite often, people in this situation are referred to as house rich and cash poor. In many cases a reverse mortgage can help them in these situations. This is what a lot of people think of when they hear the term “reverse mortgage”. But it doesn’t always have to be this way.
2. People who want to enhance their lifestyle.
As mentioned earlier, the HECM does not require a monthly principal and interest payment so getting one can dramatically improve cash flow if it is used to pay off an existing mortgage or other debt.
If this is combined with a line of credit (LOC) that is available when the homeowners need it for travel, to help family, upgrades to the home of even a new vehicle, it can dramatically increase the quality of life for the homeowners.
Another way a reverse mortgage can help with cash flow and lifestyle is by receiving the funds from the HECM as a monthly payment. This can be set up as a “tenure” payment, meaning the payments will continue for as long as the homeowner occupies the home and abides by the program guidelines. The homeowners may also choose to receive the monthly payments over a fixed “term”.
A reverse mortgage for purchase can help people get into the perfect retirement home and still not have a monthly principal and interest payment.
3. Using a reverse mortgage as part of a financial plan.
Probably the best way to use a reverse mortgage is to structure it as part of the overall financial plan. It helps to do this with the assistance of a financial advisor.
A lot of people enter retirement with a disproportionate amount of their wealth as equity in their home. Structing a financial plan to access a portion of the equity (tax free) makes sense. If the home is owned free and clear, people will sometimes set up a line of credit to have available when other investments are down in value and they need to use it. Using the LOC in this instance instead of cashing in a depreciated asset could be a wise move.
Others have used a term payment to delay taking Social Security until age 70 so they can maximize the amount. This is beneficial if someone needs to retire early but still needs cash flow.
Another great way to use the LOC is as a cash reserve. With this option, the homeowners can have 100% of their retirement portfolio working for them because they do not have to leave a percentage as a cash buffer.
Are you a good candidate for a reverse mortgage?
A lot of people do not even consider a reverse mortgage because they believe the old notion that reverse mortgages are only for desperate people. As you can see from the examples here, this is clearly not the case.
The first question you need to ask yourself is what are you hoping a reverse mortgage will accomplish for you. Then you need to make sure you understand the pros and cons of a reverse mortgage to gauge if the benefits outweigh the costs or if it is the other way around.
With over twenty years of helping people answer these questions, I would be glad to help you through the process of deciding if you are a good candidate or not.
Please feel free to contact me with any questions.
Bruce E. Simmons, CRMP, CLTC
Reverse Mortgage Manager
American Liberty Mortgage, Inc.
1932 W 33rd Ave
Denver, Co 80211
Office: (303) 458-3778
Direct: (303) 467-7821
Cell: (303) 513-2748