The ins and outs of reverse mortgages

By Alain Valles

“I heard reverse mortgages are bad” is the response I often receive when I tell people what I do. Fortunately, I don’t take it personally, but view those exchanges as an opportunity to share the pros, cons and myths about reverse mortgages. The conversation usually ends with the person saying, “Wow, I didn’t know you could use one that way,” which is the goal of this article.

Reverse mortgages are government-insured loans also known as Home Equity Conversion Mortgages (HECMs), and are administered by the Department of Housing and Urban Development (HUD). You must be at least 62 years of age with a certain percentage of home equity. Of the estimated 15 million eligible seniors, less than 1 percent have a HECM.

This is a critical statistic to understand for two reasons. First, very few seniors truly understand the pros and cons of a reverse mortgage except for what they hear from TV infomercials. Second, only a small percentage of trusted advisors have a working knowledge of reverses. So, many advisors are often skeptical or negative when discussing the merits of a HECM.

The primary areas of financial stress for many senior homeowners are:

•Being able to afford their homes;

•Increasing their monthly cash flow;

•Paying off an existing mortgage, credit cards, car loans or other debts;

•Needing cash for deferred home maintenance or paying real estate taxes;

•Having available cash reserves for unexpected life events.

The common denominator for these issues is that the majority of seniors want to remain independent and not be a financial burden on their loved ones.

Reverse mortgage borrowers can be divided into two groups. The first is needs-based seniors. Typically, the senior has been in financial balance but has had an unexpected life event such as a health issue, major house repair or other bills that have lingering balances.

The needs-based borrower has been the majority of the reverse market, but a growing number of seniors who are financially well-off with no or a low mortgage are also obtaining “line of credit” reverse mortgages to improve their lifestyles. Their primary motivation is to ensure additional funds are available to cover unexpected expenses, children/grandchildren needs, uncertain investment returns decades from now, for the purchase of a second home, travel or even the big RV they always dreamed of.

What Are The Benefits Of A Reverse Mortgage?

The key benefits of a reverse mortgage are the lenient lending qualifications, tax free cash flow, a government guaranteed line of credit and the most important feature — you have the option to never make a monthly mortgage payment for as long as you live in your home.

Warning: There is not a one-fit-all reverse mortgage product or presentation. What is important to understand is that each senior has unique needs or wants.