As the need for utilizing one’s equity to leverage a retirement fund increases, more seniors will consider using a reverse loan to protect themselves from outliving their savings and running out of money.
Boomers are living longer than previous generations and the number 1 fear for any senior, is that they will not have enough funds saved for the remainder of their lives and what will happen to them if they use up all of their retirement funds and investments?
But the use of a reverse loan can possibly remove that fear and the negative image and myths that have plagued the FHA HECM for many years, are finally changing and are now seen in a positive light.
More Financial Advisors and CPA’s are recommending to their senior clients that they consider using it to protect their retirement funds from unnecessary draw-downs, taxable consequences and preserve their portfolio.
And now the mortgage is being seen as a creative and beneficial option to allow seniors to continue to live independently in their homes and be free of the stress and worry of running out of money in the future.
With the current concerns about Medicare and Social Security becoming insolvent in the near future and that Medicaid/MediCal will not be able to meet the needs of an aging population, is very scary and depressing and how will seniors be able to live comfortably and have enough money to maintain their lives?
Through our youth, most of us were busy either attending college, working or doing both at the same time and thinking about how we wanted a fulfilling life and make piles of money in the process.
Or “not”, maybe you “partied” your way through this period of time.
Then you married, had a family, a mortgage and all the obligations that came with those choices. Regrets? Maybe, maybe not.
Once in a while you managed to afford a vacation but the dreams that you may have had when you were young, probably fell away and now are seen as unattainable. Buried under the responsibilities of marriage, parenthood and the plethora that comes with it, you gave up on the interests you may have been passionate about.
But sometimes in those quiet vulnerable moments, they return.
Years pass quickly and you have no sooner begun your career and profession, when you find yourself on the verge of retirement and without the career you had for years that was your guiding purpose, you find yourself adrift.
Your identity you cultivated over the years, vanished and now you are unsure what the last part of life will be like because it feels empty; there is no purpose…..
And there is the distinct possibility that you won’t have enough funds to retire and will be forced to continue to work well past your retirement years, because you are burdened with a mortgage.
However, you could use the funds from a reverse loan to get out from underneath it and possibly have additional funds in a Line-of-credit and not have any mortgage payments ever, again.
And having this money available to use for any purpose, could open up possibilities to move yourself forward, towards whatever it is you are passionate about and reignite those dreams from long ago. And begin a very rewarding and satisfying second chapter in your life as a retiree.
And possibly fulfill that dream that you had so many years ago?
This is a question that many ask about since there are no mortgage payments made on a reverse loan as are required on a traditional loan.
Plus there is no loan term but when does the loan become due and what are those circumstances?
They are referred to as a “maturity” event and include the following situations.
- Sells the home Conveys title of the property to someone else
- Passes away
- Resides outside of the principal residence for a period exceeding 12 consecutive months due to physical or mental illness
- Fails to pay property taxes, insurance premiums, condo fees, and other “mandatory obligations,” and all options to bring the loan current have been exhausted
- Fails to maintain the home and allows it to fall into disrepair.
The most common reason for the loan becoming due and payable is that the borrower(s) has passed away and the property and or the estate has been received by the heirs.
As soon as is possible, the heirs must contact the Loan Servicer letting them know that the borrower(s) have passed away. The Loan Servicer will send them by mail a “Due and Payable” letter within 30 days and the heirs must respond as soon as possible to the Lender.
The Loan Servicer will explain the options the heirs have to repay the loan and it’s very important that the heirs contact the Lender by calling or emailing them to avoid the possibility of a foreclosure being activated by the Lender.
The Lender does not want to foreclose on the property and the heirs have the option of refinancing it and putting the Title in their name or simply selling the home and thereby paying off the reverse mortgage.
But it is crucial that the heirs respond to the Lender letting them know how they plan to repay the loan. The Lender will work with the heirs and help them through the steps to satisfy repayment, but communication is very important in the process.
My next post will go into additional details about how to satisfy the repayment and other details about the entire process.
In my previous posts I have been sharing and discussing various mortgage options for seniors to use if they want to borrow equity from their home.
There are advantages to each of them, but overall they will require a mortgage payment each month and depending on the borrower’s finances, that may become difficult in the future, which leaves the last option, the only one for seniors and has the greatest flexibility.
And that is the FHA HECM/Home Equity Conversion Mortgage, otherwise known as a reverse mortgage and it’s only available to seniors.
“Yes”, the Closing Costs are more expensive than the other loans, but the borrower will generally receive more money and not have a mortgage payment each month and that is “priceless”.
The amount is calculated on the age of the youngest borrower and the value of the property or the HUD Lending Limit whichever is less.
The Line of Credit will never be potentially “frozen” as could happen with a traditional HELOC, plus any unused funds that are in it, will increase over time, allowing more of the borrower’s equity to be available to them without re qualifying.
There is a “Fixed” rate reverse mortgage option for those who feel more comfortable knowing that the interest rate cannot change at any time.
The loan is insured by FHA and has no prepayment penalties on it and if a borrower wishes to buy it down or pay it off any time, they can without any restrictions.
And if they wish more funds than the FHA loan provides, a Jumbo Fixed rate mortgage can be had for properties that are valued 1 MM or more.
The borrower continues to “own” their property ( not the “bank”) and it will go to their heirs per their wishes who may want to keep it and refinance the reverse loan using a traditional mortgage, but in most situations they will sell the property, receive any remaining equity and have a mortgage interest deduction in that tax year.
And if the loan amount exceeds the value of the property, the estate is not responsible for paying the difference between the two and the FHA Mortgage Insurance Premium will cover the difference
In conclusion of these multiple posts, the choices for borrowing equity are a HELOC and a Second Fixed rate mortgage or a Reverse loan. Each person’s situation is different from another’s and what might be ideal for one, may not be the best for someone else.
Each one has it’s benefits and and drawbacks but only the potential borrower can decide and hopefully will select the most appropriate loan for their goal.
I have been sharing different ideas in my last couple of posts about the options for a senior if they want to borrower equity out of their home and whether or not they are a good or ideal solution to solve a financial problem or simply wanting extra funds to be available to them for any use.
I’m going to continue this discussion in this post and one more that will follow it in a few days.
In the last couple of days, I talked about the traditional HELOC, the one that every Bank offers to their customers and now let’s pick up where I left off.
The HELOC will allow interest only payments for the first 5 years, but then will adjust to a much larger payment. Plus, the lender at any time can “freeze” the account and the funds in it will not be available to the borrower.
Too often the borrower is unaware that the loan will be “reset” in the future and if they no longer have the same income as they did when they initiated the transaction, they may not be able to afford the new and higher payment.
Sometimes a senior will use one of these loans for additional income to pay on going expenses, but obviously they will eventually run out of money in the HELOC and of course, will have mortgage payments for the term of the loan.
This can be disastrous for a senior and possibly result in them losing their home through foreclosure if they are unable to afford the payments.
The next possible choice, would be to do a traditional fixed rate 2nd Trust Deed. At least you will know what the payment will be each month, but again the borrower is obligating themselves to a mortgage payment for 15 years and they may not have the income in the future to continue comfortably making the payment each month.
And if they are a senior and or hoping and or planning to retire within a few years, will they be able to afford this obligation every, single month?
So would be the next choice?