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reverse mortgage

As Markets Wobble, Will We See a Wave of Reverse Mortgages?

May 5, 2020

Reverse Mortgages -- Are we Seeing a Boom?

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Over the past three months, the stock market has been on a roller coaster. Investment portfolios have followed suit, which could be particularly concerning for those who are counting on those funds for retirement.

For those close to retirement, a lack of savings may mean monthly expenses go unpaid. As a result, retirees may be considering a reverse mortgage to bring in much-needed cash.

“Retirement accounts have been suffering under the macroeconomic conditions that we see out there today. People are looking at the use of home equity to absorb some of those shocks in their retirement plans,” says Steve Irwin, president of the National Reverse Mortgage Lenders Association.

Because there’s a long lead time for a reverse mortgage, Irwin says it’s too early to tell if the numbers are up. However, a leading indicator shows we might be on the edge of a wave of reverse mortgages.

NRMLA data shows an uptick in consumers who’ve taken the initial step and completed the financial counseling needed to proceed with a reverse mortgage. Irwin says counseling sessions in the month of March were up 25% compared with the year before.

Before homeowners can apply for a reverse mortgage or complete a final application, they must complete independent third-party counseling, he notes, adding that those counseling sessions are up significantly in the first quarter.

Historically, those counseling sessions had to be done in-person, but because of the COVID-19 pandemic, some states have allowed online sessions.

Reverse mortgage basics

Since the first reverse mortgage in 1990, over a million have been issued and currently about 550,000 are outstanding, according to the NRMLA. Unlike a forward mortgage, in which you pay down a loan to live in your home, a reverse mortgage draws from the equity you’ve built up in your home.

To qualify for a reverse mortgage you must meet the following criteria:

  • Be aged 62 or older
  • Own your property outright or owe a small amount on a traditional mortgage
  • Live in the home as your primary residence
  • Not be delinquent on any federal debt
  • Meet with an approved counselor

Most reverse mortgages are backed by the Federal Housing Administration as part of the Home Equity Conversion Mortgage program. Once approved, a borrower can withdraw funds as a lump sum, a fixed monthly amount, a line of credit, or a combination of these options. The loan comes due when the borrower either moves out or dies.

And although the instant hit of cash may be a welcome development, the homeowner is still responsible for other monthly payments.

“Keep in mind with reverse mortgages … you still have to have the financial resources to live in the house,” says Mary Bell Carlson, the accredited financial counselor behind the Chief Financial Mom. “You’re going to be living in the house, you still owe the property taxes, you still owe the insurance, the HOA, and all the maintenance on the home while you’re living there.”

One other note: As with a traditional mortgage, there are fees and upfront costs.

Is now a good time for a reverse mortgage?

Keep in mind, a reverse mortgage will hand you money, but the lender uses the equity in your home to give you that money.

“The amount of funds available through a reverse mortgage are calculated based on the age of the borrower, or in the case of a couple, the youngest person’s age, the home’s value, and the interest rates in effect at the time,” Irwin explains. “The lower the interest rate, the greater percentage of equity that can be made available.”

Currently, interest rates are at historic lows.

“We understand a lot of people have been looking at the reverse mortgage and just haven’t decided whether or not to move forward. But they understand that responsible use of home equity can absorb different shocks to people’s income streams,” Irwin says.

Another pandemic-related factor in play? Nursing homes and assisted-care facilities aren’t exactly an appealing option in the current climate. This may partly be why some seniors are opting to stay put in their own homes.

“We know that people want to age in place, and I think many senior homeowners who may have been considering moving or moving to a care facility are almost hesitant and reluctant to go anywhere right now,” says Irwin.

Before contemplating a reverse mortgage in the current environment, you must consider if you can still pay the expenses that come with owning a home. Lower interest rates will mean more cash in your hand, but if you don’t have funds set aside to cover needed repairs, maintenance, and other expenses of homeownership, pause for a moment to suss out your best option.

“A [reverse mortgage] doesn’t mean that [borrowers] just live scot-free in the home. They still have to have some kind of cash flow to keep up the home, and they can’t let the home fall into complete disrepair. That is a violation of the contract, and they could lose the house for that,” Carlson says.

Irwin says the answer depends on each homeowner’s situation.

“This is an individual case-by-case decision, and we want to ensure that it is a decision that’s carefully considered and discussed with trusted advisers and family members. But from strictly the available amount of proceeds given the current interest rate, yes, it is a good time.”

The future of reverse mortgages

Irwin says he expects more seniors to look at reverse mortgages as the pandemic-fueled financial crisis continues.

“It’s a needs-based transaction. They need to augment their financial stability,” Irwin explains. “They need to augment whatever retirement funding they have in place, or they need to relieve themselves of the burden of monthly principal and interest payments of a regular mortgage. I think that we will see more and more the use of the reverse mortgage as part of a more comprehensive financial plan in retirement.”

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Should Retirees Rent or Own? 3 Questions to Help You Decide

November 20, 2019

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For many of us, the decision to rent or buy is dictated by our income. If the monthly costs of homeownership take up no more than 30% of your income and you can afford a down payment, then buying a home is likely to make more financial sense.

But for retirees, who are typically on a fixed income, deciding between renting and buying isn’t such a simple calculation.

Retirees may choose to relocate for a variety of reasons, including downsizing, being closer to family, or to enjoy a warmer climate.

But no matter what your motivation for moving, you may be wondering if renting or buying a home is the smart choice. If you find yourself in a similar dilemma, ask yourself the following questions.

1. Is your income stable?

When you’re on a fixed income, it greatly helps to have fixed housing costs. That’s why taking out a mortgage might make sense for retirees.

“Having to worry about rising rent costs when you’re on a fixed budget can be stressful; owning your home means you have one flat payment every month that is also building equity for the future,” says Lori Beardslee, senior branch manager and construction specialist at Silverton Mortgage in Canton, GA.

However, in some markets, renting may be a good financial decision. According to Daniel R. Hill, CFP, AIF and president of D.R. Hill Wealth Strategies in Richmond, VA, the overall cost of renting is typically cheaper than buying—when you leave equity out of the equation.

“It’s also much cheaper to move from one rental property to another than it is to sell a house,” he says. That’s because you don’t have to worry about closing costs, homeowners insurance, a large down payment, and so on.

2. Can you afford routine upkeep?

One major concern for retirees to consider is the upkeep and maintenance that inevitably comes with owning a home. Cutting the grass, painting, and other home maintenance tasks are a hassle for anyone, but they can be downright dangerous for retirees.

Of course, these projects can be outsourced, but that costs money. And major home repairs—like a new roof, plumbing, or HVAC—can run to several thousands of dollars.

One advantage of renting is that the landlord will handle a majority of the home maintenance—some will even change the ceiling lightbulbs for you.

However, there’s another option to consider.

“Owning a condo or living in an HOA-maintained property can make homeownership much easier and maintenance-free for seniors,” says Beardslee. That’s why many seniors see condo living as a happy medium.

3. Will you qualify for a mortgage?

If you decide to downsize your home or move to another location, getting approved for a new mortgage may not be as easy as you think.

“If you have not financed a property after 2008, you may not know that the rules have changed since the Dodd-Frank regulations,” says Kevin Leibowitz, founder and mortgage broker at Grayton Mortgage in Brooklyn, NY.

Before 2008, he says you only needed a large down payment and a good credit history to obtain financing.

“Today, one of the most important factors is income, so the money you might be receiving from Social Security or your pension might not be sufficient to qualify you for the mortgage on the property you want to acquire,” Leibowitz explains.

However, Beardslee believes that it might actually be easier for older Americans to get a mortgage.

“A recent survey by the National Association of Realtors® shows that older Americans are the most worried about qualifying for a mortgage, yet have a better shot at being approved over younger generations.”

She says that credit scores and debt levels tend to improve with age, and baby boomers and the Silent Generation tend to have a more desirable debt-to-income ratio. They’re also more likely to have a larger down payment from the equity in a previous home.

“This plays a huge role in the mortgage process and gives older individuals a leg up on their loan applications,” she says.

If you do plan on buying and relocating during retirement, it might be in your best interest to rent in your new neighborhood first.

“You want to learn the area, and determine if it is truly where you want to be long term,” says Jonathan Bednar II, CFP at Paradigm Wealth Partners in Knoxville, TN. “Renting will allow you to pick up and move if your living situation is not the right fit.”

The post Should Retirees Rent or Own? 3 Questions to Help You Decide appeared first on Real Estate News & Insights |®.

What Is a Reverse Mortgage? The Real Risks and Rewards, Revealed

February 13, 2019

What is a reverse mortgage? Most home buyers applying for a loan know what a mortgage is, but a reverse mortgage may seem far less familiar. Maybe you’ve heard this mortgage term bandied about, and maybe have even seen the late-night TV ads promoting them. But people are often confused or all-out clueless on the details of this type of loan, so allow us to explain.

What is a reverse mortgage?

True to its name, this type of mortgage is the opposite of a traditional loan, where you borrow a couple of hundred thousand dollars for a mortgage from a lender and then slowly pay it back month by month—plus interest. In a reverse mortgage loan, your lender pays you, slowly turning the home equity you’ve earned back into cold, hard cash.

However, just because you qualify for this type of mortgage doesn’t mean this loan option is a good idea for you. Read on to make sure you understand the risks and benefits, and how this will affect your home equity.

Who can get a reverse mortgage, and what are the benefits?

This type of mortgage is available to homeowners 62 and older, and can be useful for seniors searching for a loan who may not have much in terms of income or assets. A reverse mortgage taps into their home equity and increases the amount of money they have coming in to cover various living expenses.

“Ideal candidates are those who want to stay in their home, owe little to nothing on it, and need more cash,” says Debbie Worley, president and loan officer at Lone Star Reverse Mortgage in Horseshoe Bay, TX.

The mortgage loan must be repaid when the last borrower, co-borrower, or eligible spouse sells the home, moves, or dies.

What is a Home Equity Conversion Mortgage (HECM)?

The HECM is the reverse mortgage program offered by the FHA. HECM enables homeowners to withdraw some of the equity in their home. The borrower has the power to decide how the funds are withdrawn—either in a fixed monthly amount, a line of credit, or a combination of the two.

To take advantage of HECM, you must be 62 years of age or older, own the property or have a low mortgage balance, be living in the house as your primary residence, not be delinquent on any federal debt, meet with an approved HECM counselor.

HCEM is available only through a lender that has been approved by the FHA.

Interested in the HECM program? Visit the Department of Housing and Urban Development website.

How much money can I get for a reverse mortgage?

Most people are wondering, what is this type of loan really going to do for me? The amount you can qualify for is known as the initial principal limit (IPL). The IPL of a mortgage is determined by combining a home’s value, the homeowner’s age, the type of loan, and the interest rate. It’s rarely more than about 60% of the home’s value—and it tops out at $625,500.

There are a variety of ways you can receive money from this type of mortgage. The standard loan disbursement options include the following:

  • Lump sum: You get a large chunk of money (though you can’t access all of your equity at once).
  • Term: The borrower receives monthly payments for a fixed amount of time.
  • Tenure: The borrower receives monthly mortgage payments guaranteed to last until she dies or moves.
  • Line of credit: The loan amount can be accessed whenever the mortgage borrower needs money. And the sum grows in value, not due to interest but the assumption that the home appreciates with time.
  • Modified tenure/term: A combination of access to a line of credit and term or tenure monthly payments of your loan.

When does the mortgage need to be paid back?

A reverse mortgage can become due if the borrower fails to pay homeowners insurance or real estate taxes on the loan. But what’s more likely is that the borrower moves out or dies—that’s when a mortgage’s outstanding balance needs to be paid off, says Warren A. Ward at WWA Planning & Investments.

In the case of death, the remaining mortgage equity goes into the estate. The heirs can still inherit the home as long as the loan is in good standing; in fact, if the heirs make the home their primary residence and meet the loan terms, the mortgage can continue in their name.

The risks of reverse mortgages

In spite of these advantages, reverse mortgages have a bit of a sketchy reputation, largely due to misleading claims made by unscrupulous lenders. In the past, if only one member of a married couple put his or her name on the mortgage—and that spouse died—the surviving spouse could face foreclosure if they default on the loan.

Luckily, new laws and safety measures mandate that the surviving spouse cannot be kicked out.

But even though regulations and safety measures surrounding reverse mortgages have improved, these loans still have some sizable drawbacks. For one, they tend to have worse terms than other means of tapping your property’s value, like home equity lines of credit. Plus, the fees associated with this type of mortgage can rip through a homeowner’s equity quickly.

For instance, an origination fee on this type of mortgage can amount to a whopping 2% of the initial $200,000 of the home’s value, and 1% of the remaining value, with a cap of $6,000.

Also, when looking into this type of loan, keep this simple fact in mind: You’re basically borrowing money from yourself. Meanwhile, your lender is slowly nibbling away at the equity you’ve earned in your home. If you dream of leaving your home to your kids, you should think long and hard before you move forward with a reverse mortgage.

So even if turning your home into an ATM sounds tempting, think through various life scenarios before committing to a reverse mortgage. Shop around to get the right mortgage product, and check to see if a mortgage lender has had any complaints from past borrowers.

Because this type of loan can be complex, housing counseling is a must. The National Council on Aging offers counseling through its Reverse Mortgage Counseling Services Network, one of nine national counseling groups approved by the U.S. Department of Housing and Urban Development. There is an upfront fee of $135 for this service (which can be deferred depending on your budget).

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