Reverse mortgages are becoming popular financial planning tools for seniors in retirement. When Social Security was first implemented in 1935 the average life expectancy was 65 years. Today people are living healthier lifestyles and with improved medical technology we are living far longer than Franklin D. Roosevelt ever imagined. This is a sort of good news/bad news statistic. One of the greatest fears for older Americans is that they will outlive their assets. Even if you thought you adequately funded your retirement when you first retired, you may live so long that you will run out of funds to support yourself. The fear of insolvency will increase as life expectancies continue to climb and Social Security and Medicare become more tenuous. The enormous pressure that will be put on these entitlement programs when 78 million baby boomers begin to retire in the next couple of years, is almost incalculable. One thing for certain, is that we are all going to have to take steps to be personally responsible for funding a greater portion of our own retirement and health care than we might have predicted.
One funding source that has been gaining in popularity in recent years is the reverse mortgage. A reverse mortgage is a special type of loan that allows a senior homeowner (62 or older) to convert part of the equity in their home into tax-free cash that can be used for any purpose. There are no payments made by the borrower during the life of the loan and the loan only becomes repayable when the homeowner permanently leaves the home. The homeowner does not have to own the house free and clear, but if there is an existing mortgage on the home, it will be paid off with the proceeds from the reverse mortgage. Whatever remaining equity is left can be distributed in several different ways to the homeowner. The most popular forms of receiving the excess proceeds are either as a lump sum or as monthly tenure payments to the homeowner for as long as they live in the home.
Housing wealth has soared during the last five years in most areas of the country. However, the savings rate during that same period of time has declined. Combine that with the severe losses that many people suffered in the early 2000’s in the stock market and you can easily see that the obvious choice for many people that need to supplement their income is to tap into the equity in their homes. Many retirees are finding that they are “house rich and cash poor.”
Reverse mortgages are becoming more mainstream and originations of these mortgage instruments has nearly doubled in the last year, according to the National Reverse Mortgage Lenders Association. New and more innovative reverse mortgage products are on the horizon as lenders scramble to fill the needs for higher loan limits and more flexible products. As more reverse mortgage products become available in the market place, some are predicting that costs for these loans may decrease.
The high costs associated with reverse mortgages seems to be one of the biggest arguments against taking out a reverse mortgage. However, one must keep in mind that the cost of selling a home, which might include major repairs in addition to the real estate commission and closing costs, will almost always be greater than the cost of staying in the home and obtaining a life time stream of income for as long as you remain in the home. Additionally, it should be noted that the closing costs are not an out of pocket expense, the costs are financed into the loan, and not paid until the loan is paid off at the time the homeowner permanently leaves the home.
Educating yourself or a family member about a reverse mortgage is the only way to truly find out if a reverse mortgage is right for you or a loved one. Every senior that wants to apply for a reverse mortgage must go through a no cost HUD counseling class to be sure that they completely understand how the reverse mortgage works and what other alternatives might be available to them. Many safeguards have been implemented by the government, since the first reverse mortgages were introduced in the 1980’s. Today’s reverse mortgages are safe and offer independence and enhanced lifestyles to many “house rich and cash poor” senior homeowners. In depth information on reverse mortgages can be found at the website, Let Your Home Pay You.com
N.Sioris is a senior reverse mortgage specialist and the administrator of the reverse mortgage informational website Let Your Home Pay You