What are the 3 Main Uses of a Reverse Mortgage?
A reverse mortgage is a misunderstood, misrepresented and therefore under-utilized financial product. When people understand how they work, and how they can improve their lives, the reaction I hear most often is what’s the catch? Or, this sounds too good to be true!
The truth is reverse mortgages have been around since 1961, they started being regulated by HUD and administered by the FHA in 1988. And over the last 35 years, there have been significant improvements made to where now this is the safest mortgage available.
Another reason people are confused about them is a reverse mortgage has 3 primary ways they can be used. Each of them is unique and depends upon the client’s situation. In every case, at least one borrower needs to be 62, these can only be for a primary residence and there is no mandatory, monthly PI mortgage payment required. So, what are the 3 main uses of a reverse mortgage?
The number one way senior homeowners use them is to eliminate or make their monthly PI payment optional. As long as one borrower lives in the home as their primary residence, they maintain it, pay the property taxes, homeowners’ insurance, HOA dues if applicable, the term of the loan is 150 years. And in most cases, there is equity at the end for the next place they move to or to give to their heirs.
This allows a senior homeowner to:
- Remain at home and age in place
- Maintain their independence and lifestyle
- Retain ownership on title
- Refrain from making a mandatory, monthly PI mortgage payment
- Sustain and protect about 40% of their home equity from a market downtown
- Obtain the best interest rate whether at application or at closing
- No pain when paying off the mortgage, as the responsibility of repayment shifts from the borrower to the home, a reverse mortgage is a non-recourse loan
- Prepaying the mortgage is optional, there is no pre-payment penalty
The second way senior homeowners use them is to access their equity, approximately 35-50%, based on their age. They can access these funds 3 ways: Lump Sum, Monthly Payments or keep the money in a Line of Credit that grows by compound interest. Or there can be a combination of all of the above.
This option allows the senior homeowner to gain access to their home equity, so they have more control over their finances and future. Also, most people earn 0% return on their home equity. This strategy allows a senior homeowner to put 35-50% of their equity to work.
What other investment offers these benefits?
- Protection from a market downturn
- Insured, so the line of credit cannot be cut or reduced
- Growth by compound interest
- Equity grows tax free
- Proceeds are not taxable
- Use proceeds however you wish, except buy an annuity (the equity is already annuitized)
The third way a senior homeowner can use a reverse mortgage is to finance their next home. Many seniors today feel like they can’t afford to move. And yet, the neighborhood they have lived in for years is changing and they may not feel safe anymore. Or, they have deferred maintenance and can’t afford to do the necessary repairs.
Here’s the good news! A reverse mortgage for purchase, or HECM (Home Equity Conversion Mortgage) 4 Purchase (H4P) allows a senior home buyer to:
- Increase their purchasing power by 35-50%, depending upon the age of the youngest buyer
- Live in the part of town they want to
- Buy a newer home with updated amenities and no deferred maintenance
- Have no mandatory, monthly PI mortgage payments
A reverse mortgage allows a senior homeowner to use leverage to improve their quality of life. If you want to learn more about how a reverse mortgage may benefit you or someone you love, please reach out.