The reverse mortgage product, while perhaps something worthy of a reticent attitude in the past, has significantly evolved over the course of the last decade and should no longer be “something to fear” for seniors looking for options to finance retirement. This is according to Linda Leitz, a member of the Standards Resource Commission and a Certified Financial Planner Board in a column published by newspaper The Gazette from Cedar Rapid, Iowa.
“[T]he reasons for hating reverse mortgages have been mitigated or eliminated entirely, and FHA and HUD even regulate many of these offerings,” Leitz writes for the newspaper. “Nathan Johnson, a specialist in reverse mortgage lending warns that if the lender is put on the title as a co-owner, ‘that’s not today’s reverse mortgage,’ and he recommends you find a different reverse mortgage.”
In explaining how a reverse mortgage works to the newspaper’s audience, Leitz emphasizes the differences in loan proceeds between younger senior borrowers and their older counterparts.
“How much can be borrowed on a reverse mortgage is based on the age of one of the borrowers and the appraised value of the home,” she says. “The borrower — or at least one of the borrowers if it’s a couple — must be at least 62. The older the borrower, the larger the percentage of the appraised value the reverse mortgage might provide. For instance, a 62-year-old might qualify for 45% of the appraised value of a home, while an 82-year-old might qualify for as much as 65%. The amount advanced also will be after fees and closing costs.”
She also highlights other common points of misconception among senior borrowers, and specifies the difference between something like a Home Equity Conversion Mortgage (HECM) and a Home Equity Line of Credit (HELOC).
“The interest rate might be floating or fixed, with fixed rates currently running in the 3% to 5% range,” she says. “A reverse mortgage isn’t like a [HELOC], which often is in addition to a primary mortgage. And most lenders won’t provide a home equity loan against a home that has a reverse mortgage. Reverse mortgages are generally intended for a primary residence, not a vacation home or a rental property. The lender probably will require the borrower to confirm that the home is a primary residence at the time the mortgage is made and might require periodic confirmation that it’s still the primary residence.”
The non-recourse feature of a reverse mortgage is also highlighted, where a family member will not be “pursue[d]” to repay the loan balance after the borrower passes away or elects to move from the home secured by the loan.
“There are a couple of primary types of reverse mortgages,” she says. “One gives proceeds once. The other provides a line of credit. And some reserve mortgages provide some of both. The reserve mortgage might pay off an existing mortgage or might provide cash flow or funds to invest.”
Leitz plans to explore those types of borrowers who may most benefit from a HECM in a future column. Read the current piece at The Gazette.