Although afflicted by reputational issues that often stem from negative media coverage and a lack of full understanding regarding what they are, reverse mortgages have undergone an intense stretch of maturation into a product that has been refined by consumer protections and greater understanding. It’s these attributes that make reverse mortgages a viable option for many retirees.
This is according to financial planner Robert Klein, founder and president of Retirement Income Center in Newport Beach, Calif. in a new column at The Street.
“Like a child, reverse mortgages, including the Home Equity Conversion Mortgage (HECM) program, went through a lot of growing pains during their first 25 years,” Klein writes. “Legislation was enacted and implemented between 2013 and 2017 to strengthen the FHA Mutual Mortgage Insurance Fund (MMIF) and protect the viability of the reverse mortgage program.”
The goal of these changes was to make sure that reverse mortgages would be used as a part of a viable retirement funding strategy, as opposed to a one-time cash infusion that would leave people with little left over after the initial surge, he says.
“[Key changes have] made the product safer, stronger, and less risky for the borrower. This includes a policy that allows borrowers to tap into no greater than 60% of the lending limit in the first year,” he says. “[New changes have also] provided greater scrutiny of income and credit. Mortgagees are required to complete a financial assessment of all prospective borrowers before loan approval and loan closing. This was put into place in 2014 due to an increasing number of property tax and hazard insurance defaults by borrowers.”
Also cited as a major example of program change include the addition of new protections for non-borrowing spouses, where the spouse can remain on title and in the home in the event that the older spouse predeceases a younger one. On top of this, the continued rise of the HECM lending limit makes reverse mortgages generally more attractive to borrowers, he says.
“When used as intended, a HECM can be a powerful retirement income planning tool in the right situation,” he says. “Although it sounds counterintuitive, it can potentially increase retirement spending and provide for a larger legacy.”
The benefits should be fully understood alongside potential negative attributes, however, including upfront costs, the encouragement to spend that comes with any cash infusion, the possibility that the line of credit will not be used and the potential inability to secure additional financing that is secured by the home.
Read the article at The Street.