Reverse mortgages, officially known as home equity conversion mortgages, or HECMs, started in 1961. However, they didn’t get officially recognized by the federal government until 1987, with the passage of the Housing and Community Development Act. The next year, the Federal Housing Administration (FHA) gained approval to insure these loans. But it wasn’t until the mid-2000’s when reverse mortgages became really popular.
Although reverse mortgages are legal, there is still a lot of skepticism. This is probably due to the fact that the people who are most knowledgeable about reverse mortgages happen to be in the reverse mortgage industry. As a result, when people want to know more about reverse mortgages, they’re wary about conversations that might end in a sales pitch. And who can blame them?
As a fee-only financial planner, I wanted to write this article from an observer’s perspective. There are times when I feel reverse mortgages might be perfectly acceptable, and times when they are not. Hopefully, this article outlines some of the benefits so you can decide if you want to have a conversation to learn more.
Most of you might think, “Reverse mortgages are only for old people. I’ll just skip past this article.” Think about your parents, grandparents, or the other aging people in your life. If this article might help one person you know, please share it with them or their loved ones.
Reverse Benefit #1: You keep the home & can stay in it for as long as you want.
First and foremost, it’s important to recognize that you don’t have to give up your home in order to qualify for a reverse mortgage. In fact, you can take out a reverse mortgage AND keep your home. Moreover, you don’t EVER have to leave your home for as long as you’re alive.
This isn’t really a ‘benefit’ of a reverse mortgage. It’s more like dispelling a rumor that if you take out a reverse mortgage, you have to give up your title.
So why do I point this out? Most people who are eligible for a reverse mortgage have spent their entire lives working hard to pay off a regular mortgage. If you’ve paid off your mortgage and own your home outright, the last thing you want to do is risk losing your home.
With a reverse mortgage, you don’t have to worry about that. You keep the title of the home, and you get to use the money you’ve put into it.
Reverse Benefit #2: You can unlock the equity in your home.
Have you ever heard of the phrase, “House rich, cash poor?” That phrase is used to describe a situation where someone has a lot of their net worth, but has a hard time making ends meet.
With a reverse mortgage, you can use some of that equity in your paid-off home to support your lifestyle. It could be to help pay bills, supplement your retirement income, or to support you if an emergency comes up.
One of best things about using cash from a reverse mortgage is that unlike many forms of income, you don’t pay taxes on the money you use. This can make a reverse mortgage a great option to consider from a tax planning perspective.
Reverse Benefit #3: You can control how the money comes out.
When you obtain a reverse mortgage, you have multiple options, depending on your situation. You can take out a lump sum, or a series of payments, based upon your situation. Or, you could choose not to use it immediately, but have it available as a line of credit for future use.
When obtaining your reverse mortgage, it’s important to take some time and consider what you would use it for. When your reverse mortgage specialist understands what you intend to do, they’ll be able to help you figure out the right reverse mortgage for your situation.
Reverse Benefit #4: You don’t have to repay the loan.
By definition, a reverse mortgage is a non-recourse loan. This means that if the loan isn’t repaid, the company can’t go after your car, bank accounts, or anything else you own.
Furthermore, as long as you are alive and own the home, you can’t be forced to pay the mortgage off. The mortgage is paid off when the home is sold, or after you pass away.
Reverse Benefit #5: Your heirs have options on repaying the loan.
At some point, a reverse mortgage must be repaid. Since you don’t have to worry about repaying the loan during your lifetime, that responsibility falls on your heirs. If that’s the case, they have several options.
First, they could sell the home and repay the loan with the proceeds. This might happen when no one is really interested in living in the property that they inherited. Believe me, this happens a lot more than people think.
Second, they might choose to repay the loan with their own money, or any money they might have inherited. This would be an ideal option when someone is interested in keeping the home in the family after you pass away.
Finally, they might decide to let the bank have the home. Odds are, this won’t be the case, since everyone will probably get more money if they sell the home, pay off the home, and split the proceeds. However, if there’s a down market, everyone lives very far away, and they figure there won’t be much left over in the event of a sale, this could be an option that makes life a little less demanding on your loved ones.
There are many benefits to a reverse mortgage. However, it is still a significant decision, and worth serious consideration. Fortunately, there are professionals who specialize in reverse mortgages. These people are knowledgeable and can help you understand a reverse mortgage in more depth.
If you don’t know a reverse mortgage specialist, please contact us at Westchase Financial Planning. We’d be more than happy to help you figure out if a reverse mortgage is right for you, and put you in touch with the professionals who can help you make it happen!