HOME EQUITY MANAGEMENT AND REVERSE MORTGAGES
Based on our 20+ year experience in the financial sector we made the decision to begin offering reverse Mortgages in 2017 as a home equity management tool and as part of an overall retirement income and spending plan that can provide a variety of benefits. We believe that reverse mortgages are unique and can offer financial benefits to a wide range of homeowners.
We are aware that there is a large amount of inaccurate information about reverse mortgages that exists and that is passed on about what they are, how they work, what their benefits are, and when they are appropriate. While reverse mortgages can provide many benefits, the primary benefits generally fall under one of the following categories:
- Strategies for managing retirement cash flow and reducing debt;
- Creation of a line of credit that increases over time and that is accessible to meet spending needs and serve as an emergency fund;
- Building wealth by minimizing income taxes and allowing investment assets to grow;
- Ensuring housing security for the individual homeowners and their spouses; and
- The non-recourse nature of the debt which effectively is a hedge against declining real estate values.
The benefits of a reverse mortgage can be significant for those that have a current mortgage and current payments. However, the benefits are often more significant for those who have no mortgage at all or a mortgage with a small balance.
We have been working to educate homeowners on the benefits that reverse mortgages can provide and to correct many misconceptions that exist. We’re offering to meet with you or anyone you know that may be interested in hearing and learning whether a reverse mortgage would be beneficial. We can discuss and explain the financial planning strategies that help leverage home equity, create financial flexibility, and in some cases can result in increased net worth over time. There are no fees, no obligation and no pressure.
If you or anyone you know is interested in getting information, now or in the future, please contact Wayne Tucker at 303-468-1984 or email wtucker@spectramortgage.com.
REVERSE MORTGAGES VS. REGULAR MORTGAGES
If you are over 62, own a home and answer B to any of the following questions you may benefit from a reverse mortgage and should consider getting more information from us.
1. What type of mortgage is more secure as you approach retirement or once you are retired?
a. A mortgage that requires monthly principal and interest payments be made and if not made your house is subject to foreclosure or you are forced to sale to avoid foreclosure; OR
b. A mortgage that allows you the option of whether to make a monthly payment or not and if you choose not to you are not subject to foreclosure or forced to sale to avoid a foreclosure.
2. If you own your home and you do not have a mortgage, which would you prefer as you approach retirement or once you are retired?
a. No ability to access your home equity in retirement for emergencies, to manage cash flow in retirement or to meet other financial needs unless you get a mortgage that requires monthly payments of principal and interest (assuming you can qualify when the need arises); OR
b. The ability to access a growing percentage of your home equity whenever you want and for any purpose without the requirement to make monthly payments of principal and interest.
3. Which of the following mortgages would you prefer as you approach retirement or once you are retired?
a. A mortgage that requires you or your beneficiaries to pay the full balance of the mortgage even if the house is worth less than the mortgage at the time of sale; OR
b. A mortgage where you and your beneficiaries will neve be required to pay more than the house is worth even if the mortgage balance is higher.
4. Which type of mortgage would you prefer if married as you and your spouse approach retirement or once you are retired?
a. A mortgage where if one spouse passes away the surviving spouse IS REQUIRED to continue to make monthly principal and interest payments, even if they have lost a portion of their income, if they want to remain in their current home; OR
b. A mortgage where if one spouse passes away the surviving spouse is NOT REQUIRED to make monthly principal and interest payments and can remain in the current home for as long as they desire.
MYTH VS. FACT
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. Among the reasons people use a Reverse Mortgage are the ability to supplement income and increase monthly cash flow, increase access to liquid assets, extend the life of other financial assets, minimize income taxes, and gain financial flexibility in retirement.
FACT: This is by far the number one misconception that people have. The truth is a homeowner retains title and 100% ownership with a Reverse Mortgage.
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.
FACT: Borrowers can leave their home to their kids or other beneficiaries. When the borrowers pass away, the beneficiaries have the same options as they do if there is a regular mortgage on the property. Additionally, a Reverse Mortgage is non-recourse so the beneficiaries are never responsible under a Reverse Mortgage.
FACT: 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 non-borrowing 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.
FACT: This is not true. One of the primary benefits of a Reverse Mortgage is the ability to pay off an existing mortgage and not have monthly payments for principal and interest.
FACT: Borrowing spouses and eligible non-borrowing 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 item 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.
FACT: While a Reverse Mortgage is better suited for people who plan to remain in the home long-term, if circumstances change the home can be sold at any time. 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. A Reverse Mortgage does not have a prepayment penalty.
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
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.
FACT: The fees will vary depending on the type of Reverse mortgage selected and the strategies that are being pursued. In some (not all) cases the costs will be higher than a traditional mortgage, however, the benefits can be much more significant than a traditional mortgage as well. A cost benefit analysis can be analyzed once there is an understanding of the benefits that can be derived. In most cases, the borrower will include the costs associated in the loan amount and will not have any out-of-pocket costs.
FACT: Reverse mortgages are insured by the Federal Housing Authority (FHA). FHA interest rates on a Reverse mortgage are very comparable to traditional mortgage rates.
FACT: 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, it can be argued that a regular mortgage carries substantially more risk of losing the house than a Reverse Mortgage.
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 Spectrum of Reverse Mortgage Strategies
Portfolio/Debt Coordination for Housing
- Pay off an existing mortgage
- Transition from traditional mortgage to Reverse Mortgage
- Fund home renovations to allow for aging in place
- Purchase new home
Portfolio Coordination for Retirement Spending
- Spend home equity first to leverage portfolio upside potential
- Coordinate Reverse Mortgage and portfolio draws to mitigate portfolio underperformance
- Use tenure payments to reduce portfolio withdrawals
Funding Source for Retirement Efficiency Improvements
- Tenure payments as annuity alternative
- Social security delay bridge
- Tax bracket management or pay taxes for Roth conversions
- Pay premiums for existing Long-Term Care Insurance policy
Preserve Credit as Insurance Policy
- Support retirement spending after portfolio depletion
- Protective hedge for home value
- Provides contingency fund for spending shocks (in home care, health expenses, divorce settlement)
The desire to preserve home equity is often psychological and 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.
For more information download our Reverse Mortgage Benefits brochure.