Reverse mortgages, also called Home Equity Conversion Mortgages (HECMs), are government-insured loans that allow qualified senior homeowners to convert illiquid home equity into available tax-free cash for immediate or future use. Although reverse mortgages have been available since 1987, they still only account for about 1 percent of the total mortgage industry.
There are 20 million senior homeowners in the U.S., with many facing financial challenges that affect their quality of life. When used properly, a reverse mortgage may be the solution to living an independent, fulfilling life. But lack of understanding about reverse mortgages has led to many misconceptions including the following:
- “I will lose my home.” With a reverse mortgage you retain full control and ownership of your home. As long as you continue to pay your real estate taxes, homeowner’s insurance, and maintain your property you may remain in your home for the rest of your life. You may sell your home at any time with no prepayment penalty. Any profit from the sale after paying off the reverse mortgage is yours. In many cases properties held in a trust or life estate are eligible.
- “I can’t afford to make monthly payments on a reverse mortgage.” For qualified borrowers, the unique aspect of a reverse mortgage is there is no requirement to ever make a monthly mortgage payment. This is considered the “magic” feature of a reverse mortgage! You may receive a lump sum amount of cash, a monthly check for life, or a line of credit to be used if ever needed, all with no monthly payment for as long as you live in the home.
- “I won’t qualify because I have a mortgage on my home.” There is no requirement for your home to be free and clear. Many seniors with a mortgage are struggling to make the required monthly payment which is affecting their quality of life. The tremendous advantage of replacing that debt with a reverse mortgage is the significant increase in monthly cash flow, which can reduce financial stress.
- “Condos are not eligible.” If the condominium project is FHA-approved, then typically we can move forward. If not approved, then we must work with the condo association or management company to determine if it will meet the guidelines. The advantage of getting your condo development FHA-approved is it will generally increase the property value. Unfortunately, very few mortgage companies are willing to invest the resources to help a senior with the condo approval process.
- “Only someone who is ‘cash poor’ needs a reverse mortgage.” Nothing could be further from the truth. Even if you have no pressing need for cash or monthly tax-free income, a reverse mortgage is a credible estate-planning tool to protect against unexpected life events, such as a health challenge or family emergency. Having a reverse mortgage line of credit in place gives peace of mind that one is prepared for the unknown.
A reverse mortgage is not for everyone. There are strict guidelines and protections built into reverse programs and you are encouraged to seek information from a trustworthy and experienced reverse mortgage professional.
Alain Valles, CRMP and president of Direct Finance Corp., was the first designated Certified Reverse Mortgage Professional in New England. He can be reached at 781-724-6221 or by email at [email protected].