New Reseach: Get a Reverse Mortgage Sooner, Not Later

New Research: Get a Reverse Mortgage Sooner, Not Later

May 19, 2014 | by Editorial Team 

Today’s version of the saying “Strike while the iron’s hot” may apply to getting a reverse mortgage while interest rates are favorable, suggests new academic research recently published in theJournal of Financial Planning.

You’ve probably seen commercials and other advertisements touting reverse mortgages, but what you may not realize is that there’s also brand new research backing the use of reverse mortgages as a financial planning tool.

The Study

A group of financial planners and wealth advisors have just released a new report outlining the benefits of taking out a federally-insured home equity conversion mortgage (HECM) at a time when interest rates remain at historic lows, rather than waiting and risking the possibility of rates increasing or exhausting your retirement portfolio.

“Early establishment of an HECM line of credit in the current low interest rate environment is shown to consistently provide higher 30-year survival rates than those shown for the last resort strategies,” found researchers Shaun Pfeiffer, Ph.D.; C. Angus Schaal, CFP®; and John Salter, Ph.D., CFP®, AIFA®.

Reverse mortgages allow homeowners aged 62 and older to borrow against the value of their homes in the form of a non-recourse, federally-insured loan. In recent months, the HECM program has undergone several changes as the government seeks to make the loan a safer financial product for consumers.

These changes were considered in the financial experts’ latest report; some of the same researchers have previously explored using a “standby” reverse mortgage line of credit as a strategy to preserve and extend retirement portfolios.

For the new study, researchers projected several outcomes for a sample Calif. HECM line-of-credit borrower with a $500,000 nest egg and $250,000 in home equity at time of retirement. The nest egg comprised a portfolio split 60/40 between stock and bond investments along with a six-month cash reserve. The simulation used a 4-6% withdrawal rate of the credit line in 1% increments.

Using the simulated borrower, researchers looked at a few scenarios where a HECM line of credit was established during:

• A low interest rate environment at age 62 before the investment portfolio is exhausted
• Low interest rates once the investment portfolio is exhausted
• Moderate interest rates once the investment portfolio is exhausted
• High interest rates once the investment portfolio is exhausted

The Findings

The purpose of study was not to establish whether or not someone should take out a reverse mortgage, the researchers clarified in the report. Instead, they wanted to explore what factors to consider for a client whose income needs require the use of home equity, and how those factors impact the timing of taking out the loan.

“The empirical results from this analysis suggest early establishment of an HECM line of credit in the current interest rate and lending environment consistently provides greater survival rates than those strategies where the line of credit is established after the investment portfolio is exhausted,” write Salter, Schaal, and Pfeiffer.

However, it’s important to consider certain factors such as how long you plan to stay in your home, future home appreciation rates, how much of your loan proceeds you need to access each year, and where interest rates go, the report notes.

While each borrower’s situation is different, the research findings suggest that getting a reverse mortgage sooner rather than later may help you achieve a healthier, more sustainable retirement portfolio.

Why do People HATE Reverse Mortgages?

Why Do People Hate Reverse Mortgages?

June 12, 2014 | by Editorial

Despite hundreds of thousands of older Americans taking out reverse mortgages and surveys showing that these retirees are happy with the results, some people still have a strong distaste for them.

In nearly every case, if you dig a little deeper, much of the hatred for reverse mortgages comes from misunderstanding or lack of knowledge about the product. Here are some of the top reasons why people might hate reverse mortgages—and some counterpoints to consider as well.

Fear of the unknown

If you don’t know how a reverse mortgage works but you have heard it has a bad rap, you may dislike it purely by instinct – things that are new or confusing are often rejected. But rather than knock something you haven’t learned about, here are some facts to help you understand reverse mortgages.

Most reverse mortgages are obtained via the federally-insured Home Equity Conversion Mortgage (HECM) program. Homeowners age 62 and older can borrow against the equity they’ve built up in their homes in the form of a loan. HECMS are non-recourse, meaning you’ll never have to pay more than what your home is worth at the time of sale, even if your loan balance ends up exceeding the value of the home.

While there are some requirements of borrowers—including remaining current on homeowners insurance, property tax, and home maintenance—you’re free to use your loan proceeds however you see fit.

Reverse mortgage myths

There are a couple of reverse mortgage “myths”—common beliefs about the loan that aren’t founded in facts.
Those myths include:

• The bank will own your home
• You might lose your home or get kicked out
• There’s no way for adult children to inherit the home

One of the biggest misconceptions around reverse mortgages is that the bank will own your home if you get a reverse mortgage. This isn’t true at all. When a homeowner takes out a reverse mortgage, he or she retains the title to the home, just like in a traditional “forward” mortgage.

Reverse mortgages don’t become due and payable until the last surviving borrower dies or leaves the home. As long as you fulfill certain requirements related to taxes, insurance, and upkeep, you won’t get kicked out of your home.

While reverse mortgages do need to be repaid (which is often accomplished by selling the home), that’s not your only option. If adult children have a sentimental attachment to the home, or want to keep it in the family, heirs have the option of repaying the reverse mortgage through other means available to them. And if the home is sold to pay off the loan, there is often some money from the sale that is still inherited by your heirs.

Adult children want an inheritance

Many adult children don’t like the idea of their parents borrowing against their home equity because those children want to receive an inheritance. While it’s true that heirs will be responsible for repaying the loan once their parents pass away, there are a couple of factors to keep in mind.

Reverse mortgages insured by the Federal Housing Administration are non-recourse, which means adult children will never have to pay more than the home is worth at the time of sale.

“When a reverse mortgage becomes due and payable as a result of the borrower’s death and the property is conveyed by will or operation of law to the estate or heirs, that party (or parties if multiple heirs) may satisfy the HECM debt by paying the lesser of the mortgage balance or 95% of the current appraised value of the property,” explains reverse mortgage group the National Reverse Mortgage Lenders Association in its consumer Guide to Reverse Mortgages.

Adult children should also realize that there might be money left over after their parents take out a reverse mortgage. If the borrower’s heirs decide to repay the loan by selling their mom or dad’s house, any money left over after paying off the loan goes to the heirs.

Reverse mortgage fees

A reverse mortgage has fees that are similar to any other loan insured by the Federal Housing Administration. These include an initial mortgage insurance premium of 0.5% or 2.5% depending on the amount you take out. In addition, over the life of the loan you will be charged an annual mortgage insurance premium of 1.25% of the mortgage balance.

These fees all go to insure your loan and make sure you always have access to any remaining funds, even if your lender goes out of business. It also provides the non-recourse guarantee, which means you will never owe more than your home is worth at the time of sale.

In addition to the fees that borrowers pay to the Federal Housing Administration, there are standard title, taxes, and lender fees that vary depending on the provider. The good news is that lenders are not allowed to charge an origination fee more than $6,000 according to the Department of Housing and Urban Development, the agency that manages the program.

Loan balance that grows

Some people might not like reverse mortgages because they are a negatively amortized loan, which means that the loan balance grows over time. This is different than a traditional mortgage, which sees its loan balance get smaller as borrowers make payments each month.

Since borrowers pay for mortgage insurance, the threat of the loan balance growing too high is minimized because borrowers are protected if the loan balance ends up being more than the home is worth.

While every situation is different, a survey from AARP found that nearly 90 percent of people over age 65 want to stay in their residence for as long as possible. AARP also reported that 93 percent of borrowers said their reverse mortgages had had a mostly positive effect on their lives, compared to 3 percent who said the effect was mostly negative.

A reverse mortgage might not be the right fit for each person, but it’s time people start realizing it’s a safe way to enable older Americans to remain in their homes and live a comfortable retirement