How Reverse Mortgages Work: Payouts, Functions & Costs
Reverse mortgages, also known as home equity conversion mortgages (HECM), provide homeowners age 55+ access to instant cash from the equity that they have built
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Baltimore Reverse Mortgage Pros and Cons You Should Know
The HECM (Home Equity Conversion Mortgage), more commonly known as a reverse mortgage, is designed to help older Americans age in place and enjoy retirement.
Since its inception, the reverse mortgage program has been widely misunderstood, sometimes misrepresented and often overlooked by financial planners and consumers alike.
It’s important to get the facts before making a decision for yourself or your family.
This article will examine the pros and cons of Baltimore reverse mortgages, dispel common misconceptions and discuss the ways reverse mortgage loans can help solve America’s longevity funding dilemma.
How Does A Reverse Mortgage Work
If you’re like many older Americans, you’ve worked hard and saved money, but you may still have concerns about having enough to live comfortably throughout your entire retirement.
If you’re retired, or close to retirement, the wealth amassed in your home equity likely represents a large portion of your net worth.
Understanding how to strategically and tax efficiently incorporate this wealth into your retirement plan may be the key to prolonging and protecting your overall portfolio.
How we plan to fund our longevity is very different today than in decades past.
Historically, many companies provided lifetime pensions, which provided retirees with certainty and peace of mind.
Today, medical expenses, longer life-spans, long-term care needs and other issues have left many older Americans in Baltimore worried about the possibility of outliving their money.
Yet, older homeowners have amassed an unprecedented $7.14 trillion in untapped home equity as of the first quarter of 2019. (Source: National Reverse Mortgage Lenders Association and Risk Span)
This begs the question: Is it reasonable to ignore your largest asset when developing a financial plan?
Simply put, a reverse mortgage loan enables homeowners age 55 years old or above the ability to borrow up to roughly 50 percent of the home value.
Payouts can be made in several different types.
They can be in the form of a lump sum payment, line of credit with a guaranteed growth rate, monthly payouts or a combination of all three. (We’ll touch on how the line of credit grows in a future article.)
A reverse mortgage may also be used to purchase a home.
The HECM for purchase loan combines a reverse mortgage with the equity from the sale of your previous home – or from other savings and assets – to buy your next primary home in a single transaction.
Regardless of how long you live in the home or what happens to your home’s value, you only make one initial down payment towards the purchase, provided that you pay property taxes and homeowner’s insurance, and maintain the property.
Reverse Mortgage Misconceptions
A common misconception about reverse mortgages (aka home equity conversion mortgages) is that the bank owns the home.
This is not the case.
Baltimore homeowners retain ownership of the home, just like they would with a traditional mortgage.
Unlike traditional mortgages, there is no monthly payment requirement as long as the home remains the primary residence.
Another common misconception is that rates from reverse mortgage lenders are higher than loans from traditional mortgage lenders.
This is also false. Reverse mortgage interest rates are in line with traditional mortgage rates.
Borrowers have the option to make monthly payments or to defer payback until the last remaining borrower leaves the home.
The key here is flexibility. Reverse mortgage borrowers may access their home equity on demand.
The flexible payment option is designed to provide homeowners, especially those on a fixed income with additional cash flow later in life when a mortgage payment can often be burdensome.
They may also pay back the loan without penalty, or sell the home at any time.
Borrowers must pay their property taxes, insurance and maintain the home to comply with loan guidelines.
Reverse Mortgage Pros
- Tax-free access to untapped housing wealth with no monthly mortgage payment.
- Using the equity in the home may supplement your retirement income, allowing you to pull less from your other retirement accounts, minimizing your withdraw rate from those accounts.
- A reverse mortgage loan is a non-recourse loan. This means that neither you nor your heirs are personally liable for any amount of the mortgage that exceeds the value of your home when the loan is repaid.
- After the loan is repaid, any remaining equity belongs to you or your heirs.
- Proceeds may be used for virtually anything.
- A reverse mortgage is federally insured by the Federal Housing Administration.
Reverse Mortgage Cons
- If no payments are made, the loan balance increases over time.
- It may impact eligibility for needs-based programs such as Medicaid. (Note: regular Social Security and Medicare are not affected.)
- No additional licensing is required. Many who are licensed to originate traditional mortgages will also originate reverse mortgages as an additional income source.
While this is allowed, it is in your best interest to work with someone who specializes in reverse mortgages and understands the strategy for implementing housing wealth in retirement planning.
- While there are fixed-rate options, the majority of reverse mortgages require an adjustable rate. There are rate caps of 2 percent per year and 5 percent over the life of the loan, but the adjustable rate may cause the existing mortgage balance to rise more rapidly over time.
- If you end up moving into a long-term care facility, you’ll have to repay the loan in order to keep the property.
- A reverse mortgage is not just for lower value homes. Higher value homes can utilize Jumbo/ Proprietary loan programs.
The Bottom Line
As with any product or service, education is paramount. The reality is that the home is too large an asset to be ignored.
Today’s reverse mortgages are not meant to be a Band-Aid or short-term fix to larger financial issues.
In some cases, someone in financial distress may be better off selling the home to access more of equity, downsizing or moving to a care facility.
In other cases, a reverse mortgage is a powerful tool that can provide a more stable, comfortable and fulfilling retirement.
If you’re considering a reverse mortgage, reach out to a specialist who has expertise in this specific program and who will take the time to understand your unique needs and situation.
Steven J. Sless (NMLS: # 298581 MLO: # 49963) is the reverse mortgage division manager with PRMI. He also oversees PRMI’s office in Owings Mills – one of the nation’s only consumer-direct retail branches that deals exclusively with reverse mortgages. For more information, Contact Us, call 410-814-7575 or follow morewithsless on Facebook, Twitter, LinkedIn and Instagram.
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Reverse Mortgage FAQs
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- © 2022 Steven J. Sless NMLS #298581 | Primary Residential Mortgage NMLS #3094 | All Rights Reserved
- PRMI NMLS 3094. PRMI is an Equal Housing Lender. Some products and services may not be available in all states. Credit and collateral are subject to approval. Terms and conditions apply. Programs, rates, terms, and conditions are subject to change and are subject to borrower(s) qualification. This is not a commitment to lend. This ad is not from HUD or FHA and was not approved by HUD or any government agency. The loan is subject to foreclosure for failure to pay taxes and insurance to maintain the property and insurance and to comply with the terms of the loan. Consumers remain responsible for property taxes, homeowner’s insurance, and home maintenance.
