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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Financial planning key for seniors’ independence
If financial planners agree on one thing, it’s that financial planning is especially important for older people.
“In retirement, you bring only the resources you have,” noted Damian Gallina, a certified financial advisor and managing principal of Buttonwood Financial Advisors, in Howard County.
“It’s critical for seniors to fund their longevity,” said Steven Sless, who manages the Owings Mills branch of Primary Residential Mortgage Inc. and is a certified Long-Term Care Professional well-versed in seniors’ needs.
“People need to do a financial plan to ensure they can have financial independence throughout retirement,” said Katherine Bays Armstrong, a private wealth advisor with Heritage Financial Consultants, in Hunt Valley. “I don’t know how many people realize how important that is, but it is extremely important.”
Armstrong recommended a multi-step approach to planning. The first step, she said, is to take an inventory of what you have financially, including all assets, savings and home equity.
The second step is to have a good understanding of your income sources in retirement, including such things as Social Security and pension benefits.
The third step, which many are reluctant to look at but which she said is equally important, is to estimate your expenses in retirement.
“When you think about it, it’s about income and expenses,” she said.
Reverse mortgage
One potential source of income with a shaky reputation is reverse mortgages.
Reverse mortgages, which allow homeowners 62 and older to convert their home equity into cash without making monthly mortgage payments, were designed to allow older men and women to tap into what is often their biggest source of savings. But over the years, reverse mortgages have earned a bad rap.
Investopedia, a website that focuses on investing and finance education, says that while the mortgages can be a smart way to get needed cash, they also can mean spending a chunk of your equity on interest and loan fees, might make it impossible to pass your home down to heirs and could mean you outlive the mortgage proceeds.
Sless agreed that reverse mortgages are not for homeowners on a very limited income and unable even to pay their taxes and home insurance. However, he is a fierce advocate for reverse mortgages as a way for many older homeowners to plan a comfortable retirement.
“It’s not meant to be a Band-Aid-type loan,” Sless said. “It needs to be part of an overall retirement income strategy.”
Sless stressed that reverse mortgages work in a variety of ways. Homeowners can get lump-sum payments, monthly checks, a line of credit and more, and can choose to make monthly mortgage payments or not. They can be customized to fit the homeowner’s needs and financial situation.
“They’ve been marketed as a loan of last resort, an easy way to get cash out of a home with minimal qualifications,” he said. “But they’re also a strategy that can be used by savvier higher net worth clientele to strengthen their retirement plan.”
Financial planning for seniors also means protecting your money against scammers and con artists, who often target seniors. Government and private officials have long sought ways to help seniors with this, and one such way in Maryland is Project SAFE (Stop Adult Financial Exploitation).
Started about 20 years ago, Project SAFE is a coalition of 16 public and private organizations with the aim of preventing the financial exploitation of “vulnerable adults.”
SAFE trains the financial and law enforcement communities on how to detect and report financial exploitation, and its website (http://dhs.maryland.gov/office-of-adult-services/project-safe/) includes an abundance of tips and links to various sources for avoiding scams, including a brochure titled “Protect Your Money.”
Assistant State Attorney General Jeffrey H. Myers, the group’s facilitator, said reports of financial exploitation among seniors is growing, perhaps due in part to greater awareness of the problem.
He also said that while the average person is now well aware of the scams, the majority of the seniors who lose their money do so not to scammers but to family, friends and neighbors.
The “quintessential example,” he said is an elderly widow with a middle-aged son with a gambling or drug problem who takes money out of his mother’s bank account or steals her Social Security check.
“That’s the harder one to talk about,” he said.
This article featuring Steven J. Sless, CLTC® was originally published in Maryland The Daily Record.
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- 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.
