Daily Court Reporter - News Reverse mortgages can be another source of revenue for retirees
Reverse mortgages can be another source of revenue for retirees
ELISSA COLLOPY, Daily Reporter Staff Writer
There are a multitude of different avenues to save for retirement including traditional 401(k)s or IRA accounts. However, there is one retirement tool that is only recently growing in popularity - a reverse mortgage.
If an individual owns his or her home and is 62 or older, a reverse mortgage could provide an opportunity to convert their home equity into cash.
This financial tool has previously been considered a last-resort source of income, however a reverse mortgage has recently become a great retirement planning tool for many homeowners, according to Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association.
Basically, it allows you to take out a loan against the equity in your home. And the nice part? You don't have to repay it during your lifetime as long as you are living in the home and have not sold it.
"There are a lot of motivations heading into it," said Bell. "In some cases, people may have an immediate need to pay off debt, or they may have had some unexpected expenses like a home repair or health care situation."
With a reverse mortgage, a lender will make payments to the homeowner based on a percentage of the value in the home.
When the homeowner dies or moves out of the property, one of three things can happen, according to Bankrate: the homeowner or his/her heirs can sell the home to pay off the loan; the homeowner or heirs can refinance the existing loan to keep the home; or the lender can be authorized to sell the home to settle the loan balance.
And while there are several types of reverse mortgages, they all share the same features: older homeowners are offered larger loan amounts than younger homeowners; a reverse mortgage must be the primary debt against the house; financing fees can be included in the cost of the loan; and the lender can request repayment in the event that the homeowner fails to maintain the property, fails to keep it insured, fails to pay its property taxes, declares bankruptcy, abandons the property or commits fraud.
The most common reverse mortgage is the home equity conversion mortgage, or HECM. These are the only reverse mortgages issued by the federal government, but they come with one drawback - the maximum loan amount is limited.
Now, for non-HECM loans, a variety of lending institutions will offer loans in amounts that are higher than the HECM limit, but these are not federally insured and can be more expensive than HECM loans.
If you are nearing retirement and choose a reverse mortgage option, you have several income-generating options: lump-sum payouts, credit lines, monthly cash advances, or even a combination.
So how can this help in retirement?
In a working paper funded by the U.S. Social Security Administration titled "How Home Equity Extraction and Reverse Mortgages Affect the Credit Outcomes of Senior Households," it found almost half of seniors age 70 and older who have a credit card don't pay off their balance in full, but when taking out a reverse mortgage, this revolving credit card debt drops.
According to the study, seniors who initially withdrew $10,000 using this method reduced their credit card debt by $2,364 in the first year after borrowing that sum.
The money gained from a reverse mortgage can also be used for anything, whether that be credit card debt, extra income a month or for home repairs.
While a reverse mortgage sounds like a dream come true to some, borrowers must keep in mind that taking out a loan against your home is a big decision that will affect current finances and the estate, said Bell.
In order to achieve a reverse mortgage, substantial costs are involved including loan origination, servicing and interest. And with a reverse mortgage, debt will increase over time due to the interest.
So before taking out a reverse mortgage, research, compare costs from a variety of lenders and read disclosure documents, said Bell.
Date Published: January 16, 2018