As more baby boomers retire, reverse mortgages – known in the industry as a Home Equity Conversion Mortgage – have continued to gain momentum.
But “unfortunately, over the years, a reverse mortgage has gotten a very negative connotation, and there is a lot of misinformation out there,” says Stephen Eastman, reverse mortgages consultant for Maine and New Hampshire.
Eastman has a bachelor’s degree in business and accounting, and has worked in the fields of business and finance for more than 30 years. He said it’s important for homeowners to learn about the reverse mortgage process before applying.
Reverse mortgages, or HECMs, are issued on a case-by-case basis. They enable homeowners 62 and older to withdraw a portion of the equity in their home and convert a portion of it into cash. Unlike a traditional home equity loan, however, reverse mortgages are not repaid monthly. Borrowers are not required to repay the loan until they sell their home or die.
According to the American Advisors Group, Nelson Haynes of Portland-based Deering Savings & Loan Association wrote the first reverse mortgage in 1961 to Nellie Young of Portland. He designed the loan to help the widowed wife of a football coach stay in her home after her husband died.
Over the last several years, reverse mortgages have become increasingly popular among seniors seeking greater financial security, Eastman said.
For Charles and Louise Murray of Raymond, who applied for their reverse mortgage loan about two years ago, the experience has been positive.
The couple said that they needed the money to make necessary home repairs – such as installing a well and sliding door to their basement – in order to eventually sell their home. The Murrays were also able to lease a new car for three years with their reverse mortgage loan after their old car died.
“It made things easy for us,” said Louise Murray. “We weren’t frivolous in our expenditures. We did things that needed to be done. For us, it’s been the answer to our problems, but I (also) think you have to be cautious about what your expenditures will be, and weigh the options. It put our minds at ease.”
How to qualify
Homeowners must own their home outright, or have a low mortgage balance that can be paid off with loan proceeds at closing, and show they have the ability to pay ongoing property taxes and insurance, to be eligible for the federally insured reverse mortgage.
In addition, the home must be the primary residence and meet U.S. Department of Housing and Urban Development (HUD) minimum standards, said Eastman. Homeowners seeking a reverse mortgage must first attend a counseling session with a HUD-certified HECM counselor to discuss eligibility requirements, financial implications, and possible alternatives to reverse mortgage loans.
Homeowners often think that the lender will acquire their residence once the homeowner dies, Eastman said. The truth is that when the primary HECM borrower dies, the surviving borrower can continue to own and live in the home.
“The house will get left to the heirs, or they can sell the house if they want. The title stays in their name,” Eastman said.
According to Eastman, HUD amended its reverse mortgage policy recently to allow a younger, non-borrowing spouse to remain in the home after the reverse mortgage borrower dies, as long as the loan was issued on or after Aug. 4, 2014, and the non-borrowing spouse meets certain criteria.
Until a few months ago, Eastman said that if the reverse mortgage borrower died, the surviving spouse would have to come up with the money to pay off the loan or possibly have to move out of the house.
Closing costs fee associated with the process “are pretty much in line – and sometimes less than – a traditional mortgage,” said Eastman. In recent years, “the (closing) costs have come down.”
When the home is sold, or no longer used as the primary residence, a homeowner must repay the lender for the cash received from the reverse mortgage (plus any interest and closing fees.) A reverse mortgage loan can be repaid by selling the home. Any sale proceeds in addition to the loan balance can be transferred to heirs, Eastman said.
The two main factors that determine the amount of equity homeowners receive from the loan is their age and the appraised value of their home, Eastman said.
A 70-year-old, for example, would qualify for about 55 percent of the home value. If the home is worth $200,000, then $110,000 would be available to that homeowner through a reverse mortgage loan.
To access the money, homeowners can convert their equity into a lifetime income stream, meaning they’d receive about $600-$700 per month for as long as they live. Homeowners can also receive money from their reverse mortgage in the form of a lump sum or a line of credit, or a combination, said Eastman.
“They can use it however they want, but what’s important is that it’s not taxed,” he said. “It’s not considered income.”
Less costly alternatives to reverse mortgages include refinancing of an existing mortgage or selling the property outright, said Jason Thomas, program director and foreclosure/HECM counselor for Maine-based Coastal Enterprises Inc., a nonprofit community development organization.
“If you’re considering selling your house in a year or two there’s no sense to get a reverse mortgage,” Thomas said.
Thomas leads informational sessions for Maine’s Foreclosure Diversion Program and provides HUD-approved and required HECM reverse mortgage counseling for seniors who may be considering a reverse mortgage.
According to Thomas, one risk with a reverse mortgage is that it won’t give homeowners as much capital – or financial assets – as selling their property would. While reverse mortgages allow homeowners to access a significant portion of equity and retain ownership of their home, “the reality is that a lot of that equity may end up as accrued interest for the lender,” Thomas said.
“That would certainly have an impact on heirs, if there are any,” he added, “because it would be part of the estate that is potentially passed onto them.”
A reverse mortgage is also a mechanism for homeowners to be able to absolve themselves of their mortgage payment, said Thomas, which might allow them to retire, but means they still owe money on their property.
“It may not have an impact on the homeowner, but if it were a regular mortgage, and they kept making the payment, their balance is going down every month,” he said. “With a reverse mortgage, (the balance) is going to go up.”
Thomas said homeowners must ask themselves, “Would you rather have that money in your pocket from income for cash flow, or would you rather take that money out of your pocket, make a forward mortgage payment and watch your equity increase?”
“If people want to stay in a home or keep a home, and if they can’t afford to make payments, there aren’t many options available other than a reverse mortgage,” Eastman said.
Starting in March, HUD will require homeowners to take a financial assessment to see whether they qualify for a HECM loan. In the past, income and credit limits were not considered as part of the reverse mortgage application process.
“Every person interested in a reverse mortgage will have to do this review which will look at income and credit,” said Eastman, “to make sure that even if they get a reverse mortgage, that they are going to be able to afford to stay in their home, keep up with their taxes, insurance, and maintenance of their homes.”
Before, a reverse mortgage would only “act as a Band-Aid” for homeowners, he said. The reality, said Eastman, is that when people retire and their income is significantly reduced, some can no longer afford a house, even with a reverse mortgage.
“We’re expecting that there will be around 10-15 percent of people who would typically be able to get a reverse mortgage today that would not be able to after March,” said Eastman.
Like anything, there are pros and cons with reverse mortgages. Eastman often tells his customers to learn the facts before making a decision about whether or not to obtain a HECM loan.
“About 10 years ago, a majority of people talking to me about a reverse mortgage were in a bad financial position,” Eastman said. “Over the last 15 years, there are less people (obtaining reverse mortgages) out of necessity. More people are now doing it because they want to have a higher quality of life.”
“It’s not right for everybody,” Thomas said of reverse mortgages. “There used to be a lot of trepidation with financial advisers about reverse mortgages because it was much less regulated than it is now.”
In the last five years, Eastman said “more financial advisers have started endorsing the reverse mortgage and have accepted it as a viable retirement tool.”
Thomas said he has had more than 100 HECM counseling sessions with seniors in the last two years and a majority of homeowners are seeking the loan to pay off an existing mortgage and make their retirement years more financially enjoyable.
“Occasionally,” Thomas said, “we still run into the foreclosure-type of scenario where, otherwise, someone might be losing the property if they choose not to pursue a reverse mortgage.”
Eastman said he has consulted with nearly 1,800 seniors about reverse mortgages over the past 14 years, but has also convinced about another 800 homeowners to avoid the option.
“Sometimes I’ll suggest something other than a reverse mortgage, if it makes sense,” he said.
Kayla Collins is a staff writer at Current Publishing.