UNDERSTANDING REVERSE MORTGAGES
A “Reverse Mortgage” is a real estate loan that allows home owners age 62 and older to tap into the equity that they’ve built up in their home. But, unlike a standard home equity loan, the reverse mortgage does not require any monthly mortgage payment (other than property tax, insurance, and maintenance). The loan is repaid when the borrower sells the home or no longer lives there. Technically called a “Home Equity Conversion Mortgage” (HECM), the reverse mortgage is insured by the government and there is no deficiency liability against the borrower or their family members even if the debt owed ultimately exceeds the property’s value.
For many seniors who find themselves asset rich in home equity but short of sufficient cash to fund their retirement years, the reverse mortgage can truly be a blessing. One of our clients used a reverse mortgage to rescue their investment property from default during a market slowdown. When the values came back up, her gain far exceeded the amount she had taken out on the reverse mortgage.
Other borrowers are finding that the flexibility of having a cash resource available without an immediate payment obligation provides numerous opportunities to:
- Supplement retirement Income while preserving savings
- Pay off an existing Mortgage to free-up more cash each month
- Generate funds to cover emergency expenses such as a new roof on the home
One couple we heard of had decided that they didn’t want to obtain long term care insurance because they thought their risk was not worth the expense, especially with all the news of the costs of such insurance climbing dramatically. But still they worried about what they would do if either actually ended up needing such care. Their solution was to put a reverse mortgage on their home simply to be available to fund such care if the need ever arose.
Typically the amount available to a borrower through a reverse mortgage is up to 75% of the equity in their home and this amount can increase over time as values rise or an existing loan is paid off. This flexibility combined with no immediate payback requirement has caused many financial advisors to realize that a reverse mortgage could be an important, effective part of a sound and rewarding retirement funding strategy.
On the down side, what many people forget is that even though they are not making a monthly payment, each month the unpaid interest on the debt gets added to the principal of the loan thus reducing the property’s equity. It is possible that by the time a borrower dies or moves away, the equity in the home could be reduced to zero or even be negative. That often comes as a shock to the borrowers’ heirs who may have anticipated an inheritance. On the other hand, this loan would likely have enabled the borrowers to experience more out of their retirement years than would otherwise have been possible.
I want to thank several reverse mortgage specialists who shared their knowledge with me in the making of this Article: Doug Bertsch, Mortgage Consultants Group, 916-768-9369, DougTheLoanGuy@gmail.com; and Hank Rhodes and Thad Stanley, Reverse Mortgage Funding, LLC, 916-768-5916, firstname.lastname@example.org, email@example.com.
If you think that a reverse mortgage may be of value to you and want to know more, please contact any of the above representatives or research reverse mortgage providers on the web. There is far more information available to help you make an informed decision on whether a reverse mortgage is right for you or your family.
For over 20 years, the attorneys of BPE Law Group, P.C. have been advising and representing property owners and real estate professionals in dealing with their legal concerns including real estate, loans, and other issues affecting their real estate, business, or estate planning needs. If you would like a consultation with us, please call our office at (916) 966-2260 or e-mail me at firstname.lastname@example.org.