Reverse mortgages. The product is not new, yet many people are unfamiliar with the product or its benefits. When one considers this product has been around for more than 60 years, it is astounding that so many half-truths and misinformation still surround it.
It seems that the mainstream consumer and the mainstream financial world simply cannot wrap their arms around the reverse mortgage.
The question is, why?
And when we answer that question, it really boils down to is two more questions with a far more reaching scope.
Is the reverse mortgage a "needs-based product of last resort," or is it a "viable retirement planning tool that should be considered as just one component of an overall retirement plan?"
Those are the questions we will answer in this column.
Reverse Mortgages Have Many Purposes
Let us start with the "why?"
For the last four decades, most reverse mortgages originated for clients that displayed specific financial issues. They were delinquent on the existing mortgage payment, their real estate taxes or homeowner's insurance, or other final various financial obligations.
They might have badly needed a home improvement, such as a new roof, air conditioning unit, or another large ticket item.
These clients simply did not have the liquidity to handle these types of expenditures.
Due to this, the reverse mortgage quickly developed the national reputation of being the "lower-income individuals" answer to their many problems.
The loan was expensive. Rates on a reverse mortgage, in those days, were considerably higher than a conforming mortgage. Fees were higher. It was not unusual to see five-ten points being charged on a loan. Thus, the well-deserved reputation of being a product of last resort was not only born but reinforced.
Adding to the problem was the reverse mortgage was a no income and minimal credit verification loan. Although the great majority thought this was a positive factor over the years, the loan's no income feature proved to be a huge disaster for the reverse mortgage industry on a financial and reputational basis.
Now you may be thinking, "wasn't not having to prove income a huge benefit to those needs-based seniors?" But like so many things, it turned out to be the best example of a mixed blessing.
In reality, lending tens of thousands, and in many cases, hundreds of thousands of dollars, to individuals with poor credit, and very low income, proved to be nothing short of a disaster for many of them and the industry
It was like placing a band-aid on a gaping wound. Ultimately the wound would start bleeding again
In just a short time after receiving their funds, the client found themselves in that same bad position. But this time, they had depleted the equity in their home and were left with no options. And who was blamed for their now terrible predicament, of course, the reverse mortgage industry.
In retrospect, many thought this ultimate outcome should have been 100% predictable. But in fact, the reverse mortgage industry did help hundreds of thousands of seniors during this period. And, of course, hindsight is always 20/20.
This was the reverse mortgage industry for a better part of four decades. Is it any wonder the masses and the financial industry are still extremely gun shy of this product?
So, that is the why -
Today’s Reverse Mortgages Have Many Benefits
Now, what has changed?
Today's Reverse Mortgage is undoubtedly not the reverse mortgage of yesteryear.
Rates are extremely competitive, closing costs have been slashed by thousands of dollars, and extra protections have been implemented to protect the younger borrower after the oldest borrower passes away.
Also, when a senior client is taking a large amount of cash up front, that amount has been limited to legal obligations only (such as paying off their existing mortgage.)
Any remaining proceeds have been limited in the first 12 months and then given on the loan's one-year anniversary. The purpose of this new guideline is to ensure the client does not spend the funds immediately that were ultimately planned to last well into the future.
And one more significant change, now you must qualify for a reverse mortgage. Qualification for a reverse mortgage is, in fact, very minimal (much easier than a standard mortgage.) But this new guideline endeavors to ensure the clients have enough income to pay their taxes, insurance, unforeseen repair costs, other financial obligations, and most importantly, unforeseen medical bills.
*It is very important to note since this guideline was implemented, in July 2015, defaults on a reverse mortgage have been reduced dramatically.
Death and Reverse Mortgages
So, what really does happen when the first borrower passes away. How is the surviving borrower protected, and what are their rights?
Many people forget or simply do not think about how important this reverse mortgage feature truly is. The odds of both borrowers leaving us at the same time are astronomical.
Statistics tell us when the male borrower passes first, which is the case in the great majority of the time, the remaining female borrower loses over 60% of the household income.
How relevant, at this point in time, is it that she is not obligated to a monthly mortgage payment and possibly has extra funds available through a growing line of credit that was established decades ago just for this purpose?
And exactly, how are the heirs and estate protected?
‘Not Personally Liable for the Debt’ – What Does That Mean?
Today's reverse mortgage is the only residential mortgage in the nation that is a "non-recourse" loan. What does this mean? The borrowers are not personally liable for this debt. Only the home collateralizes this obligation.
Let me give you an example of this: In a conventional/forward loan, the debt is personally guaranteed by the borrowers. That means all of their assets are pledged to pay back that loan. If they should pass, and we are in a recession like we were in 2008-2013, and the home is worth less than the mortgage balance, the lender can attach other assets of the client's estate.
With today's reverse mortgage, all assets such as life insurance proceeds, bank accounts, stocks, and retirement accounts are untouchable.
The heirs/estate can never be responsible for any negative balance on the mortgage.
These are just a few of the reasons that financial advisors, insurance agents, and consumers alike have started to view the reverse mortgage as a viable option in an overall and more comprehensive retirement plan. And why it is mt be very financially prudent to consider using it at the beginning of your retirement, rather than at the end.
LTC Insurance and Reverse Mortgages – A Good Combination?
Here is our next question.
Can the proceeds of a reverse mortgage allow literally millions of people, 62 years old and above, to purchase Long-Term Care Insurance that otherwise might have thought it beyond their reach?
And that question will be answered in our next column.
According to an Associated Press poll, most people aged 40 and over think they will need long-term health care at some point in their lifetime. Despite an appreciation of the issue, most people neglect to do any planning to address the problem. The result is a family in crisis.
People need extended health care due to an illness, accident, or the impact of aging. We experience changes in our health, body, and mind as we get older. Frequently, these changes suggest we will need help with normal daily living activities. In some cases, we need supervision due to some type of dementia.
Tools on LTC NEWS Help in Your Research
The consequences of long-term care are devastating to our families and finances. According to the LTC NEWS Cost of Care Calculator, some facilities can cost over $100,000 a year. In-home care can be less costly but is still expensive.
Affordable Long-Term Care Insurance delivers guaranteed tax-free funds providing you a choice of quality care, including in-home care that most people prefer. In 2020 the major insurance companies paid over $11.6 billion in benefits. Families can focus on being a family, not caregivers.
LTC NEWS offers numerous tools and resources to assist you in your research so you can address the financial costs and burdens of aging easily and affordably.
Find all the resources on LTC NEWS by clicking here.
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