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Reverse Mortgages are not well understood by homeowners, financial advisors, real estate professionals or attorneys.  Most do not understand that Reverse Mortgages can provide the following benefits:

1. Eliminate the current mortgage payment.
2. Supplement retirement income and increase monthly/annual cash flow.
3. Maintain and build wealth in retirement.
4. Free up capital when purchasing a new home.
5. Manage tax liabilities more efficiently and at a lower overall cost.
6. Help people remain in the home without the fear of being forced to move due to financial reasons.
7. Provide significant benefits for surviving spouses.
8. Offer a source of capital and liquidity for needs such as home improvements, helping family or the cost of healthcare and long-term care.

The frame of reference most people have for a Reverse mortgage is from 20 years ago.  Beginning in 2012 and continuing through 2020 there were major changes and revisions to Reverse mortgages and now they have become a key component in the retirement income strategy and wealth building strategy of sophisticatd homeowners and financial advisors.  In addition to the financial benefits, there are significant non-financial benefits such as providing security for spouses and beneficiaries and additional options when planning for healthcare, long term care and estate planning.  Unfortunately, not enough people are aware of the benefits, and worse they continue believe the myths and misinformaton that still exist.

This article will address the misinformation and myths that still exist regarding Reverse mortgages.

MYTH VS FACTS

MYTH #1 – A Reverse mortgage is a loan of last resort.

FACT:  Reverse mortgages have evolved from strictly a needs-based product to a solution that many financial planners recommend as an important component of a comprehensive retirement plan and a retirement income strategy.  Approximately 50% of the clients we have done a reverse mortgage for have been wealthy and view the Reverse mortgage as an investment and finanical planning tool that also offers benefits for estate planning, healthcare and long-term care planning.

MYTH #2 – When you get a Reverse mortgage you no longer own your home, the Bank owns it.

FACT:  This is the number one misconception that people have.  I have had homeowners, financial advisors planners and attorneys state this as a reason to not do a Reverse mortgage.  The truth is the homeowner retains title and 100% ownership with a Reverse mortgage.

MYTH #3 – The bank takes your home when you pass away.

FACT:  When a homeowner passes away, their ownership interest goes into their estate or is transferred to the joint tenant the same as if there were not a Reverse mortgage on the property.

MYTH #4 – My kids or other beneficiaries will be on the hook for a big liability.

FACT:  Borrowers can leave their home to their kids or other beneficiaries.  When the borrowers pass away, the beneficiaries may either pay the balance due on the Reverse mortgage and keep the home or they may sell the home and use the proceeds to pay off the reverse mortgage.  They will never pay more than the house is worth.  If they sell the home, any remaining equity after the Reverse mortgage is repaid is theirs to keep.  This is no different than what happens with a property that has a regular mortgage.

MYTH #5 – The bank can foreclose if you owe more than the house is worth.

FACT:  The way reverse mortgages are structured today this is highly unlikely,  However, the only requirements to remain in the home are that the property taxes and insurance are paid, the HOA dues (if applicable) are current, the house is reasonably maintained, and that the last surviving borrower or an eligible spouse does not vacate the house for more than 12 consecutive months. Even if you owe more than the house is worth, the bank CANNOT foreclose if you continue to meet these requirements.

MYTH #6 – My spouse can be forced to move out of the home if I die.

FACT:   Borrowing spouses and eligible spouses can remain in the home after the co-borrower or the primary borrower passes away. The spouse only needs to continue to meet the conditions of the loan (see Myth 5 above).  In many ways this provides more protection than a regular mortgage.  This factor is one of the prime non-financial benefits of a Reverse mortgage.

MYTH #7 – I cannot ever sell my house if I have a reserve mortgage.

FACT:  While a Reverse mortgage is better suited for people who don’t plan to sell anytime soon, if circumstances change and you do need to sell, you can. You simply sell the home, pay off the balance with the proceeds of the sale, and the remaining equity is yours to keep.  No different than any other mortgage.  Also, a Reverse mortgage does not have a prepayment penalty.

MYTH #8 – Social Security and Medicare will be affected.

FACT:  A Reverse mortgage will not have any effect on your Social Security payments or Medicare benefits. However, there could be an impact on Medicaid or other public assistance programs that are means tested. Talk to your adviser to make sure you fully understand the impact if you have means tested benefits.

MYTH #9 – I will have to pay taxes on the money I get from a Reverse mortgage.

FACT:  The proceeds from a Reverse mortgage, whether paid in a lump sum or periodically, are not subject to income tax.  Consult a tax advisor for more information.

MYTH #10 – Reverse mortgages are extremely costly.

FACT:  This is subjective since the fees will vary depending on the type of Reverse mortgage selected and the strategies that are being pursued.  In some cases, the costs will be higher than a traditional mortgage but it should be remembered that the benefits are much more significant than a traditional mortgage as well.  A cost benefit analysis can only be analyzed once there is an understanding of each individuals unique goals and how a reverse mortgage can be utilzed to meet these goals.  In most cases, the borrower includes the costs associated with the reverse mortgage in the initial loan amount and will not have any out-of-pocket costs.

MYTH #11 – Reverse mortgage interest rates are higher.

FACT:  The majority of Reverse mortgages closed are guaranteed by the Federal Housing Authority (FHA).  FHA interest rates on a Reverse mortgage are comparable to traditional mortgage rates.

MYTH # 12 – Reverse mortgages have hidden risks that can cost you your home.

FACT:  This is a catchall myth.  The terms of a Reverse mortgage are very clear.  A borrower must pay their property taxes, homeowner’s insurance, keep the property in good repair and must maintain the property as their primary residence.  These obligations are not hidden.  In fact, for anyone carrying a regular mortgage, with monthly mortgage payments in retirement, I would argue that a regular mortgage carries substantially more risk of losing the house than a Reverse mortgage.

The last myth to discuss deserves its own section because in some ways it is the least understood part of a Reverse mortgage but may be the most significant benefit.  Often people hear or believe the following.

MYTH #13 – A Reverse mortgage will use up all my equity and reduce the amount available for inter-generational wealth transfers to my kids, grandkids or other beneficiaries.

FACT:  The common belief is that a Reverse mortgage reduces equity, thereby reducing the value of the estate for the homeowner’s heirs and this is presented as a negative.  Current research and thinking on Reverse mortgages show this is not necessarily the case:

1. The belief that equity is reduced is often not true since the amount of the mortgage, the length of time it is outstanding, and the appreciation rate of the house could result in an increase in equity;
2. Even in situations where the equity is reduced this is not a weakness, it is by design. A basic underlying philosophy of a reverse mortgage is that the homeowner can make better use of their equity than their heirs or other beneficiaries.  This can allow them to be self-sufficient and in a better position to fund their retirement, enhance their quality of life, and effectively manage all their assets.
3. When used in a strategic manner, the use of a reverse mortgage can result in a greater ability to pass on wealth since it can be used to preserve other financial assets that can continue to grow.

The desire to preserve home equity is often a psychological constraint that people impose on themselves which can lead to a less efficient retirement.  Under the concept of retirement income efficiency, home equity and other financial assets are equivalent, and they should be looked at in total rather than in isolation.  While taking money from the Reverse mortgage may reduce the home-equity component, it does not necessarily reduce the overall net worth or value of the total assets since other financial assets can grow rather than be drawn down.

Retirement-income efficiency is defined as: using assets in a way that allows for more spending and/or more wealth over time.

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If you are interested in finding out about the benefits a Reverse mortgage can offer contact Wayne Tucker at 303-468-1985 or at wtucker@spectramortgage.com.

For a retiree on a fixed income and a budget, carrying debts that require monthly payments can be difficult and create financial stress.  With high interest rates, these monthly payments often do not reduce the principal owed in meaningful way.

Whether the debt consists of high-interest credit cards, automotive debt or no-interest medical debt, if your monthly payment obligations are taxing the limits of your monthly budget, a reverse mortgage may offer some breathing room by allowing the debts to be paid off and the monthly payments to be eliminated.

How A Reverse Mortgage Works

• Cash received from the reverse mortgage can be used for any purpose.
• Amounts received from a reverse mortgage are not subject to income tax
• The homeowner continues to own the home and can pass on the property at death.
• Reverse mortgages do not require monthly payments;
• Reverse mortgages do not require repayment until i) The borrower no longer lives at the property; ii) The borrower sells the property; or iii) The borrower fails to uphold the terms of the mortgage;
• The homeowner will continue to pay home related expenses such as insurance, property taxes and HOA dues as normal.

Eligibility For A Reverse Mortgage

The homeowner must be 62 years or older to qualify for a government insured Home Equity Conversion Mortgage (HECM).  Age limits can vary for non-government insured reverse mortgages with the youngest age for qualification being 55.

How A Reverse Mortgage Can Help Manage Debt

The proceeds of a reverse mortgage can provide the money to pay off existing debts and eliminate the monthly payment.  This can immediately improve the financial position of the homeowner and their ability to manage their retirement.  Key advantages that a reverse mortgage may provide include:

• Elimination of monthly payments;
• Increased monthly cash flow that can be used for other purposes;
• Reduced Stress; and
• Improved Financial Control

Other Features Of A Reverse Mortgage

• Ownership of the home and all future appreciation
• Reverse mortgages are secured by the home, the same as a traditional mortgage.
• A reverse mortgage is non-recourse for the borrower
• The homeowner can pass on the property to anyone they desire

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We may be able to help you improve your financial position through proactive mortgage planning.  For anyone interested in learning how home equity can be used to improve their financial position contact Wayne Tucker at 303-468-1985 or at wtucker@spectramortgage.com.

When approaching or reaching retirement it is common for homeowners to sell their current home to accomplish one or more of the following objectives:

1. Purchase a smaller and/or less expensive home
2. Relocate to live closer to family and friends
3. Relocate to a retirement community

OLD STRATEGY

Sell the current home and use the the proceeds from the sale to pay cash for the new home.  No mortgage and no mortgage payment on the new home.

For example, the homeowner sells the current home and receives $300,000 after expenses and paying off the mortgage balance (if any). They then purchase a new home for $300,000, or less, for cash.

The old strategy has two limitations.  First, the homeowner is limited on the purchase of the new home by the amount of cash they receive from the sale of the old home. Therefore, if the new home costs more than the cash they received (in the example above, $300,000) they will need to come up with additional cash or they will need to get a mortgage and make monthly mortgage payments . The homeowner may not have additional cash and may not want, or be able to afford, monthly mortgage payments. This means relocating/downsizing may not be feasible if the new property is going to cost more than the old property.

The other limitation of the old strategy is that in today’s real estate market the homeowner will most likely use all the cash proceeds which will then be tied up in the new home. Once used to purchase the house it is difficult to access this equity in the future without incurring substantial fees, a monthly mortgage payment, and the need to qualify for a mortgage or line of credit.  Even if the homeowner is able to spend less than $300,000 on the new home they will still tie up more money in the new house than required in the new strategy outlined below.

NEW STRATEGY

Sell the current home for $300,000 and obtain a Home Equity Conversion Mortgage. This mortgage (sometimes referred to as a reverse mortgage) is guaranteed by the Federal Housing Authority (FHA) which is a part of the U.S. Department of Housing and Urban Development (HUD).

Option One

Purchase a new home for $300,000. Use $150,000 from the sale of the current home and get a Home Equity Conversion Mortgage of $150,000 (These numbers are an illustration.  The amount available on a reverse mortgage will depend on the age of the homeowner, the value of the property and current interest rates.  The amount available on a reverse mortgage generally ranges from 35% to 65% of the value of the property).

The Home Equity Conversion Mortgage does not require monthly payments for principal and interest is not required to be paid off until the homeowner moves and/or sells the property (the homeowner can make payments at any time if they choose).  Under the illustration for option one the owner retains $150,000 in cash that they can use for other purposes or keep in reserve.

Option Two

Combine $300,000 cash received from the sale of the current home with a Home Equity Conversion Mortgage of $200,000 to purchase a new home for $500,000. The Home Equity Conversion Mortgage does not require monthly payments for principal and interest and is not required to be paid off until the homeowner moves and/or sells the property (the homeowner can make payments at any time if they choose).

With option two the homeowner is able to use the proceeds to acquire a more expensive house if necessary or desired without having to assume a monthly mortgage payment.

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The strategy outlined above allows the homeowner to more effectively utilize their equity in the following ways:

• Invest cash to increase their income and overall wealth
• Use excess cash to pay for home improvements, create an emergency fund, consolidate debt or plan for medical or long term care expenses
• Purchaese a more expensive home without having to make montly mortgage payments.

In order to be eligible to take advantage of the opportunities presented by Home Equity Conversion Mortgaes at least one of the homeowner must be 62 or older (if married) and the house must be the primary residence.  The options outlined above are only one feature of a Home Equity Conversion Mortgage-there are many other benefits and planning opportunities that they can provide.  Find out if they you or a family member or friend could benefit from a Home Equity Conversion Mortgage by calling Wayne Tucker at 303-468-1985 or emailing him at wtucker@spectramortgage.com

Spectra Mortgage Corporation
3900 South Wadsworth Boulevard
Suite 415
Lakewood, CO 80235

Ph: 303-468-1985

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