The Benefits of Reverse Mortgage

Reverse mortgage products are often misunderstood. A lot of eligible seniors shy away from the product because of the hefty fees associated with it. Other misconceptions stem from knowledge of old programs during the subprime lending era.

Old and outdated information about existing reverse mortgages may prevent seniors from reaping the wondrous benefits of a potential financial tool.

But before we dive deeper into the reverse mortgage realm, what exactly is a reverse mortgage?

Reverse mortgage defined

In simple terms, a reverse mortgage is a loan product specifically designed for senior homeowners aged 62 and above. The program allows the homeowner to use the benefits of homeownership and all those years of building up equity to buy or continue to own their existing home without the need to make any mortgage payments.

Its key features include:

Being able to stay and live in your home for as long as you want even if your loan balance is greater than the market value of your property
Payment can be through: a) a lump sum b) a line of credit c) an income stream, or d) a combination of these payment options
Borrowers are able to use the proceeds of the loan as they see fit, whether it is to pay for home improvements or to pay off certain debts
Borrowers may opt to pay taxes and insurance on their own OR set up a LESA to set aside the taxes and insurance to be paid by the reverse mortgage lender
NO monthly mortgage payments

A reverse mortgage only becomes due when the owner decides to sell his or her home, refinance back to a forward mortgage, or if he or she passes away. If the homeowner passes away and there is still some equity left on the property, the heirs hold rights to that equity. If, however, the homeowner lives for many years and passes away without equity on the property, there is no money that needs to be paid back because the loan is insured by the Federal Housing Administration (FHA).

Why seniors are now considering a reverse mortgage

Decades ago, reverse mortgages are a last resort for many. But recent data show that the product is starting to gain popularity.

While reverse mortgages were originated at a pace of 5,000 to 10,000 loans annually just over ten years ago, now, they are being originated at a pace of over 70,000 a year.

What could have driven such change?

The aging American population may take part of the blame. According a 2010 Census data, there were already over 40 million Americans aged 65 and above. Experts predict that just in a span of three decades, that number will double. On top of that, Americans are also living longer while the cost of health care and long term care continue to increase.

A 2016 GoBanking Rates survey revealed that about half of US families have NO retirement savings accounts. So what are they going to do when they’re already too weak to work and get a steady income? Where will they get the money to pay for elderly care? Is social security even enough to cover for all their needs?

For seniors approaching retirement, a reverse mortgage is an option worth considering.

What are the benefits of a reverse mortgage?

>> Increases your cash flow

Maintaining the lifestyle that we’re accustomed to during our working years may be hard to do financially during retirement. Given that most retirees have little to no money in their savings, they will have to depend on meager pension money which sadly is just not enough to allow them to live comfortably.

A reverse mortgage which allows the homeowner to tap into his or her home’s equity provides an easy solution to this dilemma. Since the borrower doesn’t have to shell out money every month to pay for the loan, he or she can instead use it to increase his or her cash flow and pay off some necessary expenses.

>> Extends the life of your retirement savings

Yes, you may start drawing from your social security benefits at the age of 62. But did you know that delaying your social security withdrawals can actually increase your benefits?

Per the IRS, that could be up to 6 to 8 percent of increase annually. The longer you delay tapping into your pension, the bigger the amount of benefits you will get.

The same principle can be applied to your 401k plan, another retirement savings account for many seniors. Once you start drawing funds from this account, you also have to start paying taxes.

Funds from a reverse mortgage loan can help you afford these delays, thereby extending the life of your retirement savings.

>> Mandatory counseling

To be able to successfully get a reverse mortgage, you need to take a counseling session with an independent, third-party HECM counselor certified by the HUD who will orient you about the program.

This is done to prevent homeowners from getting a loan with terms they don’t totally understand.

As you can probably recall, one of the primary reasons that fueled the 2008 crisis was the overwhelming number of borrowers who held loans they didn’t know the terms to.

Take for example, those most coveted adjustable-rate mortgages with very low initial interest rates. Most borrowers did not realize that their loans will eventually reset and their payments will double. The surprise caught many homeowners off-guard and ill-prepared, causing an avalanche of foreclosures.

With FHA’s HECM, the counseling certificate is made a requirement for the loan, ensuring that seniors know what’s in it for them.

>> Increases over time

Many seniors are worried about outliving their retirement savings – even those who have saved a significant amount of money in their accounts. Really, there’s no telling how the demands of life can affect you and your finances.

In this case, it’s great to know that your reverse mortgage money actually accumulates and increases in value over time if you don’t draw from it.

For example, you have a line of credit worth $100,000 and you ceased drawing from it for a decade and a half. After this period, your credit line will now be worth $300,000. Considering you have enough savings for that period, you would reap significant benefits after your funds run out given you took the reverse mortgage at the right time.

Every senior settles differently and therefore has their own unique needs. FHA’s reverse mortgage offering via the HECM program is designed to answer to these needs, especially at a time when they need it the most.

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