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REVERSE MORTGAGES-WHY?

Real estate

The primary reason people do not understand reverse mortgages is because there is a lot of misinformation presented by the media, financial advisors, accountants, attorneys and friends and family.  Although often well intentioned, the information presented consists of half-truths (at best) and at worst, totally inaccurate information.  And worst of all, the true benefits are not be presented due to a lack of understanding about what a reverse mortgage is, how a reverse mortgage works and what the benefits of a reverse mortgage are.

The intent of this article is not to explain reverse mortgages or to address many of the half-truths and inaccuracies that float around.  Many of these are addressed on the Spectra Mortgage website on the reverse mortgage page here.  What I want to do is to highlight the fact that for many people a reverse mortgage is superior to a traditional mortgage because it offers more security, financial planning opportunities and financial efficiency than a traditional mortgage.  Reverse mortgages also provide unique financial benefits to people who do not have a mortgage. Lastly, they can be a hedge against real estate values going down during retirement.

FINANCIAL EFFICIENCY

What is meant by financial efficiency is the ability of an individual to manage all assets in a unified manner with the ability to chose which asset can be used to best meet a financial obligation or need.  For example, rather than selling an investment or taking money out of a retirement account to meet a need and thereby lose the earnings from the investment, it may be more efficient to use a reverse mortgage and leave the other funds invested.  This can be accomplished without having to take on a large payment which is required if a traditional mortgage is used for the same purpose. The use of the reverse mortgage also avoids an income tax liability if investments or retirement assets are liquidated.

FINANCIAL PLANNING OPPORTUNITIES

For those with low mortgage balances or those without a mortgage there are significant benefits that reverse mortgages can provide.  A reverse mortgage can help manage sequence of return risk that is a major issue in retirement planning.  Simply stated, sequence of return risk is the risk that an individual will run out of money faster than expected due to market conditions.

A reverse mortgage can also provide access to a line of credit the grows every year, is easily accessible, cannot be frozen and allows, but does not require, payments.

Lastly, a reverse mortgage can be used to be a valuable tool for retirement income planning (which is different that financial planning).

SECURITY

Many ask if reverse mortgages are safe or will state that they believe they are unsafe.  The mortgage that is not safe for someone in retirement, or approaching retirement, is a traditional mortgage.  Here are two examples.

Example 1

Homeowner is 64 and is still working and has a mortgage.  Homeowner gets laid off or loses a job.  Being older it may be harder to replace the lost income and it can certainly take longer to replace.  With a traditional mortgage the bank does not care.  The payments are still due and if not made will ultimately lead to foreclosure.  If the homeowner had a reverse mortgage, they could have made payments if they desired but when they lost their job, they could have stopped making payments with no possibility of losing the house.

Example 2

Homeowners are married and both receive Social Security.  One spouse passes away which means the survivor only receives the higher of the two social security amounts, not both.  This effectively cuts their income by up to half or more.  With a traditional mortgage the bank does not care.  The payments are still due and if not made will ultimately lead to foreclosure.  If the homeowner had a reverse mortgage the fact that their income has declined does not matter since they are not required to make payment anyway.

REAL ESTATE VALUES

With a traditional mortgage if prices were to decline to the point where the loan balance exceeds the value of the property, the homeowner is still required to pay the entire balance of the mortgage.  This is known as being “underwater” and has happened often during recessions and when real estate values decline.

With a reverse mortgage if the homeowner is “underwater” the borrower is not required to pay the full balance if they sell the house or move.  They are only required to pay what the house is worth, and the rest of the mortgage is written off with no impact to the borrower or their beneficiaries.  This is a feature unique to reverse mortgages because they are non-recourse to the homeowner if they are “underwater”.

If the homeowner establishes a reverse mortgage when values are high and then real estate values decline, a homeowner will benefit since the reverse mortgage was based on the higher values.  Therefore, a decline in values is less harmful with a reverse mortgage compared to a traditional mortgage and is a hedge against a collapse in real estate values.

For more information on reverse mortgages and to get a complete picture of them, contact either Wayne Tucker at wtucker@spectramortgage.com or Kim Renquest at krenquest@spectramortgage.com. They can both be contacted at 303-468-1985.