What is a Reverse Mortgage?
Imagine that when you first bought your home, you planted a backyard garden full of beautiful plants and trees. Sometime later, you upgraded from carpet to polished new wood floors. A few years after that, you installed gorgeous bathroom fixtures. Imagine that, little by little, your humble house has evolved into a stunning home, and consequently, these changes have caused it to increase in value. This, combined with the diligent manner in which you have been paying your mortgage every month, has helped your equity become significant. Now in retirement age, you are in a position where you would prefer to access this equity, and a reverse mortgage is a loan that can help you do just that.
History of a Reverse Mortgage
Reverse mortgages began with a simple concept: to help senior homeowners age in their homes. The best way to help you age in your home is to allow you to access its equity and convert it into cash. The cash is yours, earned by paying your monthly mortgage payment throughout the years and improving aspects of your home to increase its market value.
However, in the past before reverse mortgages, the only way that you could access the equity in your home was to either sell it or take out a second mortgage. The first of these options meant you could no longer live in your home, and the second meant you would have to continue paying a monthly mortgage payment. No option was available that combined the benefits of aging in your home with no monthly mortgage payment and access to equity.
Change began to happen in the early 1960’s, and the idea of a new loan product began to emerge that would that satisfy these needs like never before. This loan product would revolutionize the way a senior homeowner could age in place.
In 1961, the very first reverse mortgage loan was written to help a widow remain in her home despite the loss of her husband’s income. Eight years later, the Senate Committee on Aging at a congressional hearing was intrigued by the idea of “an actuarial mortgage plan in the form of a housing annuity”. In 1988, President Ronald Reagan signed the reverse mortgage bill into law, establishing a government-insured product for the first time called a Home Equity Conversion Mortgage (HECM). Today, this loan product only continues to develop further and improve in safety.
Protections Put Into Place
Insuring the HECM reverse mortgage loan product under the Federal Housing Administration (FHA) is only one step of many taken by the mortgage industry to put consumer protections into place. The loan product is constantly being evaluated and new laws continue to be added, further developing the reverse mortgage into one of the safest loan products on the market today. The following are three of the protections recently implemented.
1. Financial Assessment Requirements
Effective April 2015, this change requires reverse mortgage lenders to conduct a financial assessment of all applicants, in order to determine whether or not they must set aside a portion of their proceeds to fulfill loan obligations. Although borrowers were accustomed to having no credit requirements before this change, they are now evaluated more thoroughly, allowing at-risk borrowers with the means to meet their loan obligations, if needed. In the long run, this change will protect consumers from defaulting
2. Non-Borrowing Spouse
Effective after August 2014, this change protects the non-borrowing spouses of reverse mortgage borrowers. Before this protection was put into place, spouses could risk losing the home if their borrowing spouse needed to move to a nursing home or passed away. For example, if a borrowing spouse found they needed to move into a nursing facility full-time, their non-borrowing spouse could not remain in the home they shared. Now, as long as non-borrowing spouses establish their legal ownership and take responsibility of the loan, they may remain in their homes for a deferral period.
3. New Principal Limit Factors
Also effective August 2014 is a related change called the Principal Limit Factor. This change will allow borrowers with non-borrowing spouses under the age of 62 to still qualify for a reverse mortgage, possibly giving them access to higher loan amounts. Before this change, eligible borrowers would not qualify if they had a spouse under the age of 62 on the title to the property.
Common Misconceptions about Reverse Mortgages
Reverse mortgages have seemed “too good to be true” to many consumers on more than one occasion. After all, how can one loan product possibly offer so many benefits at once? Consequently, a few myths about it began to emerge. Fortunately, simple research into the product will reveal that many of these common myths are simply fiction. Read on for the truth.
Misconception #1: “The bank automatically takes ownership of my home when I sign up for a reverse mortgage.”
Truth: As a reverse mortgage borrower, you continue to own your home and keep its title. As long as you meet all loan terms as promised, such as paying property taxes and home insurance, you will keep ownership and title of the home.
Misconception #2: “If my home’s value ever dips below my loan balance, I will end up owing more than my home is worth.”
Truth: HECMs are non-recourse loans insured by the FHA. What this means for the borrower is that even if your loan balance exceeds the value of your home, you will only owe the amount the home sells for. Federal insurance will cover any difference between the selling price of the home and your actual loan balance.
Misconception #3: “If I sign up for a reverse mortgage, I will end up passing debt on to my heirs.”
Truth: With a HECM, neither borrower nor heirs will ever owe more than the value of the home when sold, due to the aforementioned insurance. In fact, if the loan balance is less than the value of the home, then heirs inherit the remaining equity after the loan is paid off from the home’s proceeds.
Is a Reverse Mortgage Right For You?
As with any loan product, you want to proceed with a reverse mortgage only after you have determined that it is the right fit for you and your situation. The following three questions may help you understand what type of person this loan product may be best for, and can help you determine if you are one of them.
Who is a reverse mortgage right for?
A reverse mortgage was designed for senior homeowners who desire to remain in their home and age there. This loan product may be a good fit for you if you have no plans to live elsewhere and you have a significant amount of equity that is able to be pulled from your home to be converted into cash.
Who can get a reverse mortgage?
Seniors ages 62 years or older who own and live in their home as their primary residence are most qualified for reverse mortgages. In addition, senior homeowners who have their mortgage paid off may be able to access more money, although you may still qualify even if you have a mortgage balance left.
Who may not be the best fit for a reverse mortgage?
Because reverse mortgages are best for those who want to continue living in their home, if you foresee moving out of your home in the near future, it may not be financially worthwhile to enter into a loan that will mature quickly. In addition, keep in mind that although benefits such as Social Security, Medicare, and pensions are not affected by getting this loan, Medicaid and Supplemental Security Income may be, as they are income-based programs.
Your home is one of your greatest assets in building and solidifying a stable retirement future. Fortunately, you have options if you want to access its equity. When considering a reverse mortgage, it is worthwhile to do thorough research and review all the information you can to determine if it would be a good fit for you.
Guest Post by American Advisors Group