If I Could Turn Back Time: Reverse Mortgage

April 7, 2014

On previous shows, I’ve mentioned that the single most important mortgage product of the foreseeable future is the Home Equity Conversion Mortgage, HECM, or Reverse Mortgage. Fundamental shifts in America’s economy demographic makeup suggest reverse mortgages will continue to grow in popularity. As the Baby Boomers begin retiring at a rate of 10,000 each day, and as the economy continues to lag, more and more people will seek and utilize new financial instruments that are both safe and offer a reliable source of income.

As with most niche mortgage products, reverse mortgages are not well understood by the general population. Even those who have heard the term are cautious, if not downright skeptical, of esoteric financial tools, since memories of the 2008 subprime meltdown are still vivid.

The first thing to know about reverse mortgages is that they’re time-tested and extremely safe products. The law creating Home Equity Conversion Mortgages was signed in 1988 by President Reagan, they are meticulously regulated, FHA-insured, and every precaution is utilized by both the government and the lending institution to ensure the borrower understands the product fully. Since there are no established credit or income qualifications, virtually anyone with substantial home equity can utilize a reverse mortgage. (Obviously lenders prefer lending against homes that are owned free-and-clear or have low LTV ratios; for a Home Equity Conversion to work, there has to be equity in the home to convert!)

The principle purpose of the reverse mortgage is to provide older individuals with a low-risk source of extra income as a one-time lump sum, regular monthly payments, or some combination of the two. Therefore, anyone taking out a reverse mortgage must be 62 years old or older. And since the product is neither designed nor intended to be used as creative financial instrument, certain rules exist that limit how the product can be used: Reverse mortgages can only be taken out on primary residences (that is, they cannot be taken out against investment properties), though they can be used with 1-4 unit properties as long as the borrower occupies one of the units; the property must be fee-simple (no co-ops); or, if it’s lease-held, it must have at least a 99-year lease.

A common question regarding reverse mortgages is what happens to the home during and after the term of the loan. Few people, especially those in precarious financial situations, like the idea of a bank having a lien against their property. So it’s important to stress that with a reverse mortgage the bank cannot repossess the home; the borrower retains ownership until their passing. Further, unused equity is bequeathable. (Is that a word? Or should I add it to the list of words I’ve coined, like ‘meticulate’?) That is, the borrower’s children can inherit unused equity. They also have the option to pay the mortgage and retain ownership of the home. Finally, if the value of the home falls below the amount of equity withdrawn, neither the borrower nor their family is responsible for the deficit. As an FHA-insured product, the difference is covered by the government and settled between the FHA and the lender.

I’ve only scratched the surface of this mortgage product, but over the next few months I’ll delve deeper into it and address and questions or concerns I hear about it. I’m confident it’s a program that most elderly folks should at least consider, and will grow in popularity over the next few decades. In the meantime, I have a lot of great and very knowledgeable loan officers at Garvens Mortgage Group who are experts in this field and can answer any questions you might have on this and any other mortgage product.

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