A reverse mortgage loan may be a tempting prospect for a homeowner over the age of 62, particularly if they’re looking for new and novel ways to make ends meet in retirement. It may be a loan worth exploring, as long as the potential disadvantages of the product category are understood before engaging into one of the loans. This is according to a new column at CNBC.
“It’s called a reverse mortgage because the payments for this loan actually work in reverse: You don’t repay the lender until you permanently move out or die,” writes CNBC personal finance journalist Jill Cornfield. “As long as you continue paying taxes and maintaining the home, you cannot be evicted.”
Reverse mortgages come with a wide variety of options for a borrower to access a loan’s proceeds, including in a lump sum, monthly payment or line of credit option, Cornfield explains. She also solicited the input of a well-known financial expert in crafting the column.
“Most popular is the variable-rate Home Equity Conversion Mortgage, according to Wade Pfau, professor of retirement income at the American College, in Bryn Mawr, Pennsylvania. This type of mortgage, aka an HECM, is insured by the Federal Housing Administration and offers several payment options,” she explains.
Another option detailed based on Pfau’s input is a proprietary reverse mortgage, as well as “the single-purpose reverse mortgage offered by some state or local government agencies,” she says.
Among a series of listed “pros” and “cons,” the pros consist of a borrower having the ability to tap a home’s equity without needing to move out, and keeping the title to the home. For the cons, Cornfield lists “high fees” including an initial mortgage insurance premium; no one living with the borrower under the age of 62 can be considered a borrower of the loan; and less money is ultimately left to the borrower’s heirs.
However, reverse mortgages appear to be getting another look by potential borrowers. Applications for new reverse mortgages jumped 15% in March according to data cited from Reverse Market Insight (RMI), and options for seniors that can involve physical distancing in a senior’s own home may become more naturally popular due to the pandemic. This is according to Carolyn McClanahan, a physician and certified financial planner who is founder and director of financial planning at Life Planning Partners in Jacksonville, Fla.
“Retirement communities and assisted living facilities have become more common in recent decades. However, in the age of COVID-19, Americans may decide that large groups of older people living together in one place might not be a good idea after all, McClanahan says. This could mean that more people will try to age in place,” Cornfield writes.
Read the article at CNBC.