As more American seniors find themselves economically impacted by the COVID-19 coronavirus pandemic, more of them may be looking at new financial options that they may not have considered before in order to make ends meet. One of these new potential options may be a reverse mortgage, and it’s in that spirit that Money.com has published a new article that purports to offer its readers “everything you need to know” about the product concept.
While the article offers objective information about the realities of a reverse mortgage transaction, it also takes a cautious approach in informing readers about the complexity of the product category.
“For seniors wondering how to fund retirement, tapping the wealth you’ve built in your home can seem appealing,” the article begins. “But reverse mortgages are complicated and can have big downsides you need to [be] aware of before you commit.”
Detailing the history of the Home Equity Conversion Mortgage (HECM) program and recent reforms that have been instituted to it, the article does take into account the work of prominent financial researchers and academics who have discussed the positive potential of reverse mortgages in the financial lives of seniors.
“Used strategically, a reverse mortgage can greatly improve the sustainability of your retirement income,” said Dr. Wade Pfau, professor of retirement income at the American College of Financial Services as cited from a 2016 interview with Money.com.
In describing the process of a reverse mortgage becoming due and payable upon the borrower’s exit from the home, the article also cites Jack Guttentag, the “Mortgage Professor,” who previously discussed the process of repaying the loan when the borrower exits the property.
“That is not a weakness of the program, it is by design,” writes Guttentag in a 2018 Forbes column cited by Money.com. “The presumption is that the homeowner can make better use of the equity than his heirs.”
A potential borrower also does not have to own his or her home free and clear, contrary to what is characterized as a popular belief according to Bruce McClary, VP of marketing at the National Foundation for Credit Counseling (NFCC). Still, McClary advises prospective reverse mortgage borrowers to be sure they’re working with a loan officer who has their best interests in mind.
“If you’re facing financial hardship and you’re considering a reverse mortgage to ease that stress, one of the things you need to think about is how long this period of financial hardship is expected to last,” McClary says in the article. “If it’s temporary, you don’t want to get into debt long-term.”
Also listed is a series of pros and cons related to reverse mortgages. In the “pros” column, the article lists attributes including not requiring monthly payments while the borrower lives in the home; acting as a “safety net” particularly as an alternative to high-interest credit cards; using a reverse mortgage’s proceeds to put off drawing on Social Security; and a loan’s proceeds not being viewed as “income” for tax purposes.
In the column of “cons,” the article lists the inability of a borrower or heirs to claim a tax deduction when the loan is paid off; high costs like an origination fee, appraisal fee, closing costs and mortgage insurance premium; and the fact that previous homeowner obligations – particularly the need to continue paying taxes and insurance – still remain for reverse mortgage borrowers.
Read the article at Money.com.