Debunking the Myths Surrounding a Reverse Mortgage
Education and Careers While a reverse mortgage may seem intimidating, our panel of experts weigh in on the multitude of benefits it can have on your road to a successful retirement.
What kind of impact can a Reverse Mortgage have on someone's financial future?
CK: Planning for retirement can be challenging, especially when you think of all the risks that retirees are faced with these days. Leveraging some of the equity that you have built up over time through a reverse mortgage can provide a safety net that will allow you to navigate a successful retirement.
JH: Effectively utilizing a reverse mortgage as part of a retirement income plan can add years of longevity onto a retirement income portfolio and substantially improve a retiree’s financial situation. Reverse mortgages can help improve cash flow in retirement, especially during down markets or at times when unexpected expenses arise. Reverse mortgages are also often more effectively used earlier in retirement, as opposed to a last resort.
PB: Because of the loan’s flexibility, older homeowners can use a reverse mortgage to support short and long-term financial goals in retirement. Proceeds from a reverse mortgage may meet a current need for additional cash flow or be set aside as a source of funds to draw on in case of a future financial shock, such as a medical emergency.
TK: A reverse mortgage can provide an alternative income stream in retirement and increase financial flexibility. A Home Equity Conversion Mortgage (HECM), a reverse mortgage product insured by the Federal Housing Administration (FHA), can be helpful in timing different financial flows, such as when to access retirement investment funds or social security. For example, a borrower could use HECM funds to wait out a decline in the stock market or delay Social Security benefits to maximize their value. A borrower can also eliminate their forward mortgage payments and increase their disposable income. Thus, taking out an HECM as a line of credit can be a prudent financial move, including for borrowers who do not have an immediate need to use the cash.
What's one piece of financial advice you would give to people looking to have a successful retirement financially?
CK: Regardless of where you are on your glide path towards retirement, it’s never too late to start planning. Ideally, saving for retirement early on would provide the biggest runway for success, but life tends to get in the way. Leveraging the right retirement income strategy can help close the gap and lead to a more sustainable and enjoyable retirement.
JH: Anyone looking to have a financially secure and happy retirement needs to have a retirement plan in place. This means visualizing what you want in retirement, reviewing your expenses, adding up your income sources and evaluating whether or not you can live a successful retirement. But to do that correctly, you need to consider all of your assets and expenses, including your home, which is often a retiree’s largest asset and expense.
PB: As people plan for their future, it is imperative they become knowledgeable about all of the financial tools and resources that may be available to them during retirement. From learning the basics of Social Security and Medicare to evaluating whether or when to incorporate home equity into a comprehensive retirement funding plan, a successful retirement hinges on good preparation.
TK: Start planning and saving as early as possible. Get educated, seek out trusted advisors and consider all the options available for retirement income. Nearly two-thirds of American households own their primary residences, but only slightly more than half (52 percent) have retirement accounts. So, equity held in the home is a broader source of wealth and thus potential retirement income. A reverse mortgage could help homeowners meet their financial goals and improve their quality of life given trends like rising health care costs and the precarious status of many pension and social assistance programs.
What's one myth you'd like to debunk about Reverse Mortgages?
CK: There are a number of myths and misconceptions out there about this loan program. One of the most common is that, “bank gets the house.” The reality is that the borrower holds title, exactly the same as with any traditional mortgage. This means they have the right to make payments if they choose, sell the home or pass it on to their heirs. It is important to remember, as with any mortgage, the borrower must remain current on property taxes, homeowner’s insurance and any HOA dues.
JH: The biggest myth that needs to be debunked about reverse mortgages is the notion that, “it’s just not for me.” Many people have a negative view of reverse mortgages or believe that it’s only for the house rich and cash poor. In reality, reverse mortgages are vastly underutilized and not over utilized according to a recent MIT research project.
PB: With a reverse mortgage, the homeowner never gives up title or ownership of their home to the lender.
TK: One myth about reverse mortgages is that they are all prohibitively expensive. Reverse mortgages come with fees, and those fees may vary substantially between lenders. It’s important to note that different lenders have different upfront costs and fees, so it’s important to shop around to get the best deal, as with any other product.
What's something you think everyone should know about Reverse Mortgages?
CK: Historically, the conventional wisdom on Reverse Mortgages was to utilize the program after exhausting your retirement portfolio. Recent research suggests that leveraging your housing wealth via a Reverse Mortgage early on in retirement, in conjunction with a coordinated strategy, may lead to a more successful retirement outcome.
JH: Reverse mortgages are a form of borrowing and there is a cost. But retirement is not just about costs, it’s about managing cash flow. A reverse mortgage can be used to increase your cash flow, refinance a traditional mortgage or even to purchase a home. Every homeowner should keep an open mind and learn more about reverse mortgages as they near retirement to see if it could improve their chances for a more secure retirement.
PB: A reverse mortgage is a home equity loan specifically designed for retirees and near-retirees that more than one million senior households have used to supplement retirement savings and support aging in place. Older homeowners who are considering a reverse mortgage loan have an opportunity to ask questions and receive unbiased information during a required session with an independent reverse mortgage counselor prior to completing their loan application.
TK: There are protections in place for borrowers. HUD requires counseling with an approved counselor before taking out a government-backed reverse mortgage. Reforms made in 2015 require better underwriting of HECMs to ensure that borrowers can meet their insurance and tax obligations, reducing the risk of foreclosure. Jumbo reverse mortgages (above the HECM limit of $679,650) can carry more risk, there is no counseling requirement and fees are not restricted. Thus, it is imperative to fully understand the product when considering a reverse mortgage.