A mortgage expert and analyst describes that reverse mortgages have evolved considerably from complex and confusing financial instruments into well-structured tools for greater flexibility in retirement, due in no small part to additional protections handed down to borrowers involved in the Home Equity Conversion Mortgage (HECM) program sponsored by the Federal Housing Administration (FHA) and the U.S. Department of Housing and Urban Development (HUD).
This is according to Keith Gumbinger, vice president of Mortgage Research firm HSH.com, who spoke on a recent episode of Kiplinger’s “Your Money’s Worth” podcast on the topic of home equity.
When exploring the topic of home equity over the course of the discussion, the topic of retirement naturally came up which led to the discussion of reverse mortgages. Gumbinger describes how reverse mortgages were seen in their early days, and how they’ve changed over the course of their existence in the United States.
“For a lot of borrowers, [reverse mortgages] can provide a great level of comfort and flexibility,” Gumbinger says. “If you are someone who is, and I wouldn’t say simply living on Social Security, but whose retirement assets are meager, and if you’re in an expensive part of the world, and certainly on the coasts, very expensive, those tax bills come up every year. Maintenance bills come up every year. Your fixed income may not go as far as you thought it might or would.”
Reverse mortgages can now be “a very important part” of a well-structured retirement plan, he says, but suffered significantly in their early days due to confusion about how the loan would be repaid after the borrower died or left the home, he says.
“Unfortunately, in the early days, [reverse mortgages] got kind of a bad reputation because of a lot of high fees, a lot of misunderstandings on how these things were structured and how they needed to be repaid after borrowers passed away, very complicated,” he says. “What’s in the marketplace today predominantly are those Home Equity Conversion Mortgages that are backed by the FHA. They’re backed by HUD. These are well-structured, easy to understand. And unlike in some of the wild and wooly days of yesteryear, you actually have to go get counseling before you can sign up for one.”
Fees are also more well-structured and “probably more manageable,” Gumbinger says, and can lead to better circumstances for particular retirees.
“Most importantly … and we talked about, should you pay off your mortgage in retirement,” he says. “If you decide to go with a reverse mortgage, your first mortgage gets retired. You pay it off with the proceeds from this. You eliminate the debt you have to make payments on. You can borrow money that you don’t have to make payments on. And this can provide very good levels of flexibility, especially if we’re talking about a meager sort of asset structure when you’re retired.”
A reverse mortgage is not a scenario that can work for everyone, he says, but the product has noticeably evolved into something that is better now than it was before, he explains.
Listen to the podcast episode with Keith Gumbinger at Kiplinger.