Benefits of a reverse mortgage - Bend Bulletin
As a Senior Real Estate Specialist broker for Coldwell Banker Morris in Bend, I have met a lot of seniors and retirees who struggle financially even though they’re sitting on over $500,000 . . . the equity in their homes. For years, the big question for real estate investors has been “How do I access the equity of my investment without selling or taking out a costly mortgage that impacts my cash flow?” For seniors, the cash flow issue is front and center, with housing costs, medical concerns, portfolio losses, and all else that faces the aging population on a fixed income. One alternative is to sell and rent. As many have found, that is not an easy or cheap option in places like Bend or anywhere else desirable. There are just not a lot of affordable options.
The prospect of retiring in a home that’s paid off has long been the American Dream, or certainly part of it. Not having a mortgage payment certainly makes room to afford more golf balls and martinis. All is well and good if the remainder of your portfolio supports the lifestyle you want to have in your golden years. By not having to pay a mortgage, your retirement portfolio is not getting drained, leaving it to grow to be passed on to your heirs upon death. But what happens if these options fall short or there is room for improvement going forward?
Many have taken advantage of the FHA Home Equity Conversion Mortgage (HECM), more commonly known as a reverse mortgage. After getting past the behavioral and informational impediments that go along with it, there are a ton of benefits to consider. Learning how it works from someone who truly understands it is the first hurdle. Not all banks or mortgage companies offer it, and sadly many financial advisors are not up to speed on it either, oddly enough since it’s an FHA loan product. That said, there are some great sources for advice on the product, and not surprisingly they’re some of the best mortgage professionals in town.
Simply put, the loan is available to those over 62 who have a 50 to 60 percent equity position either from a down payment or in current equity. The older you are, the more you can borrow. The property type can be any FHA-approved property, such as a single family residence, duplex, triplex, fourplex, condo, or townhome. The loan is in first position and the borrower has the option of making a payment or not, generating income off rental properties. Property taxes and insurance, however, must be paid.
As Debbie Tallman, senior reverse mortgage specialist with Fairway Mortgage in Bend, explains it, “Reverse mortgage interest rates are comparable to traditional mortgages, with the exception that there is no term on a reverse mortgage (repayment of debt is not required until they no longer live in the home).”
In addition to standard closing costs for a purchase or refinance, the HECM reverse mortgage is federally insured through FHA, Tallman added, which means there is a mortgage insurance cost of 2 percent based on the maximum claim amount (the lower of the appraised value or sales price), which is financed into the loan amount.
If the borrower opts for not making a payment, it stands to reason the loan grows by the payment they’re not making. Back to that cash flow conversation—this can make a huge difference in the quality of life for a retiree and is a great way to access those dollars you worked so hard to get by paying off or paying down your home. Added bonus: the proceeds are tax-free. Those proceeds can be used for in-home care, family assistance, nonprofit funding, college, portfolio preservation, investment, and so on. All at today’s value, and those you benefit can say thank you now instead of after the fact.
“The goal of the reverse mortgage is to help homeowners 62 and older age in place by converting their home equity to cash. The HECM reverse mortgage is no longer the loan of last resort. Today it is a viable tool for retirement planning. It can increase financial longevity, quality of life, and most of all, peace of mind,” said Tallman.
It is most important to know how the loan grows over time relative to the property value. You need to know how much from an amortization chart. There is a cost for sure and this will be made abundantly clear in consultation with the loan advisor. Additionally, FHA HUD requires an extensive counseling process for each borrower.
Depending on location, this can be achieved locally or by phone, Tallman said. The counseling appointment lasts about 45 minutes and the purpose is to provide a better understanding of the product based on the particular circumstances.
At the end, borrowers will know exactly how this loan works, what it costs, and whether it works for them. I can guarantee it can provide an entirely different reality than they have now. The reverse mortgage can be part of a comprehensive financial plan and not a last-resort scenario made in haste. It can mean the difference between living in a certain town or neighborhood by enabling the homeowner to buy at a higher value point. There are simply more nice, easy-to-care-for single-level homes in the $500,000 price range than the $300,000 price range. Downsizing doesn’t necessarily have to compromise lifestyle; it should be “rightsizing.” Qualifying for the loan is unlike qualifying for a traditional loan. Since there is no payment required, the focus is on the property and the ability to pay taxes and insurance.
A wise colleague once told me, “Don’t believe everything you think.” That rings true for just about everything financial. Many well-meaning friends, relatives, and coworkers have unwittingly sent folks down the wrong path with earnest but inaccurate financial advice. Get the real facts from the best resources. I’m frequently dismayed to see folks stubbornly clinging to a narrative that is not in their best interest. I understand that because I was one of them.
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