As a financial planner, it’s almost guaranteed that your clients will come to you with inquiries about how they can access their equity. In some cases, it might be required.
For older clients who own a home, a reverse mortgage could be the right option to access additional liquid funds rather than accessing sums from their retirement funds or
other investments.
That said, there are pros and cons of reverse mortgages for seniors. It’s only the right option for someone in the right financial situation, which you can learn more about by reading on!
What is a reverse mortgage?
A reverse mortgage can be used by homeowners 62 and older. The mortgage allows your client (the homeowner) to borrow against their equity to receive either cash or a line of credit (LOC) from a lender. It is called a reverse mortgage because the money is moving “in reverse." Instead of paying the lender monthly, the lender is paying the borrower. This is a great option for those who are considered “house rich” but “cash poor.”
Unlike a regular mortgage, your client isn’t required to make monthly loan payments. Instead, the loan is repaid when the borrower or their heirs sell the house or encounter a maturity event.
Home Equity Conversion Mortgage
Backed by the Federal Housing Administration, a home equity conversion mortgage (HECM) is one of the most common types of reverse mortgages.
Much like a traditional mortgage, a HECM:
- Allows the homeowner to borrow money and use their home as security for the loan.
- Keeps the title of the home in the homeowner’s name.
- Requires the homeowner to pay property taxes and homeowners insurance.
Unlike a traditional mortgage, a HECM:
- Does not require monthly mortgage payments.
- Has a balance that increases over time but is repaid once the home is sold or a maturity event occurs.
What are the pros of a reverse mortgage?
Once you decide to speak to your client about the benefits of a reverse mortgage, you can begin with the following factors. However, if you ever feel stuck on one aspect of the process, contact a Loan Officer who can provide more information.
Allows Borrower to Tap into Equity
This is perhaps the biggest benefit of a reverse mortgage. Your client can tap into the home’s equity to draw on cash or a line of credit and receive monthly payments from the lender. The funds received through a HECM are not considered income and therefore are not taxable.
Delays Accessing Other Retirement Portfolios
The funds received through a reverse mortgage not only give your client a sense of financial security, but also take pressure off retirement portfolios, delay social security applications, manage adjusted gross incomes, and extend assets beyond what traditional retirement planning offers.
Provides Access to Line of Credit (LOC)
Your client will have the opportunity to repay a portion of their loan balance and borrow it back again as needed. During this time, the loan does not accrue interest, and mortgage insurance on the portion of the LOC that remains untouched. A LOC also provides:
- Security: The funds in the LOC are secured. They are not capped, restricted, frozen, or eliminated if property values decline.
- Growth: The available funds in a LOC will grow. The untouched portion of the LOC grows at a compounding rate.
- Flexibility: A LOC offers more flexibility and growth than the homeowner would have received with a monthly fixed payment or a fixed-rate lump sum disbursement at closing.
Avoids Drawbacks of Selling the Home Outright
After selling a home outright, accessing a large sum of cash from home equity and placing it in a bank account might be a problem for certain means-tested benefits. A reverse mortgage avoids this unless the client puts the HECM proceeds into a means-tested
asset account.
What are the cons of a reverse mortgage?
Though fewer than the benefits, there are drawbacks to a reverse mortgage. Be sure to understand your client’s financial situation before proceeding further with a
reverse mortgage.
Possibly Financially Irresponsible
Although your client could pull the entire LOC and immediately carry a balance on the home while also accruing interest, if the balance exceeds the current value of the home at the time of a maturity event, they would only get 5 percent of the home’s value back. Whereas selling the home outright provides more proceeds.
Taxes and insurance will need to be paid on time. Defaulted payments could mean paying the balance in full, leading to foreclosure if they do not have the funds or cannot sell the home to repay.
Children Might Lose Inheritance or Inherit Less
One of the biggest downsides to a reverse mortgage is the loss of inheritance for the child. Because the reverse mortgage is generally paid after your client leaves the home, it’s not guaranteed that the home's value will exceed the debt.
A Move Could Impact Payment
Your client may choose to move to a smaller home or a retirement home in the future. If this happens, it could lead to a faster turnaround payment. Although this could be resolved by selling the home, the loan must be paid back within six months and could lead to a foreclosure if it is not.
Gain guidance on reverse mortgage pros and cons with radius.
All the ins and outs of reverse mortgages can seem like a lot, but you don’t need to master them alone. Reach out to one of our Loan Officers to collaborate with you and your client and determine if a reverse mortgage is an ideal option.
* This guide is for educational purposes only and should not be construed as financial advice. These materials are not from HUD or FHA and were not approved by HUD or a government agency. Not tax advice, consult a tax professional. The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, and insurance. The borrower must maintain the home. When the last borrower or eligible non-borrowing spouse passes away, sells the home, permanently moves out, or fails to comply with the loan terms, the loan becomes due and payable (and the property may become subject to foreclosure). Reverse mortgages are currently not available in NH and TN with radius financial group, inc.
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