It seems as if it used to be a given that we would work until we are 60 and then retire from the job we have been on for as long as we can remember and live comfortably on a pension and sit on the front porch whittling sticks and, well, whatever you do when you retire.
These days, that is more of a dream for many people than a reality. Pensions are almost non existent while IRAs and 401ks that were supposed to last a lifetime, may have dwindled to only last 5-10 years if used as a source of income.
In this day, living off Social Security is a stretch at best. Many seniors also got caught up in the refinance craze of a few years ago, taking advantage of very low rates and minimal qualifying, but now stuck with payments that are tougher to make on a fixed income.
The dream of being comfortable for your retirement is not as much a “sure thing” as it once seemed. A lot of senior homeowners have to go back to work or look at the possibility of selling their home.
The Reverse Mortgage is one financial tool that can help many senior homeowners. I am going to touch on this over the next several Blogs, discussing the basic definition with follow up posts discussing uses and myths surrounding the Reverse Mortgage.
It is not the only solution and there might be other solutions for the financial challenges of a senior homeowner. But it is a solution that has helped many senior homeowners be in a better place.
The Reverse Mortgage
As the name suggests, the Reverse Mortgage is "reverse" of what a normal mortgage is. In a typical mortgage, the borrower writes a check to the bank each month paying a piece of interest and a piece of the balance of the loan (i.e principal).
With a reverse mortgage, the borrower does not write a check to the lender. It is a loan with no monthly payments due and in many cases the lender sends a monthly check to the borrower depending on what the needs are. This comes from the equity of the home. The payments and interest grow over time and are added to the balance. Upon the borrower moving, passing away or just deciding to payoff the loan, the total balance is due.
If the home is sold the borrower or heirs get whatever equity there may be. This is a called a "non-recourse" loan which means the borrower will not owe more than the property is worth upon sale. For example, if the home sells for $400,000, but the RM has grown to $500,000, the borrower would not owe more than the $400,000.
The reverse mortgage, or RM, is a financial tool that allows senior (62+) homeowners to stay at home and maintain a good quality of life. It has no monthly payments due, no income qualifying, and no credit score qualifying. There are two basic purposes of the RM: debt consolidation and income supplementation.
These can then be broken down into many more uses. A third possibility is for buying a home. This is a newer use of the RM and will be touched on in a later post. A fourth possibility is just having fun (buying a vacation home, a boat, a fancy car etc.) with no additional monthly payments.
Many senior homeowners get to retirement, but instead of burning the deed on their home, they may still have 20+ years left on a mortgage after refinancing multiple times. On a fixed income, meeting the monthly mortgage payments can be more challenging.
For some consolidating the existing mortgage and other debt into a loan that has no monthly payments makes a huge difference for the senior homeowner, allowing them to not have to rely on investments as much and breathe a little more.
Some seniors may need to subsidize their existing income for various reasons, including in home-assisted living, unexpected expenses, or just quality of life.
Funds for a RM can come in a lump sum, monthly income (for life or a specific time frame), or a line of credit. In some cases, a senior may take an upfront lump sum, have a specific monthly income and have funds left available in a line of credit. There is flexibility depending on what the needs of the senior are. There are no limitations on what the funds can be used for.
Currently, almost all RM’s are FHA (Federal Housing Administration) insured and have many protections for the senior, including upfront counseling. I will cover this in a little more detail in future blog posts.
For local senior events and activities, you can check out the Senior Center newsletter. The August issue can be found
here.
I am usually at the Senior Center every Wednesday from 9:30-12:30 to answer any questions regarding Reverse Mortgages.
