What is a Reverse Mortgage?


Will the reverse mortgage surge in the coming years? We think so. Tyler Durden at Zero Hedge wrote yesterday, “Nearly eight years into an economic recovery, nearly half of Americans didn’t have enough cash available to cover a $400 emergency. Specifically, the survey found that, in line with what the Fed had disclosed in previous years. Forty-four percent of respondents said they wouldn’t be able to cover an unexpected $400 expense like a car repair or medical bill, or would have to borrow money or sell something to meet it. 

Troubling as this statistic remains, the overall share of adults who would struggle to come up with $400 in a pinch has declined by 2% from the last survey conducted in 2015, and down 6% since 2013.

Of the group that could not pay in cash, 45% said they would go further in debt and use a credit card to pay off the expense over time. While a quarter would borrow from friends of the family, and another 27% just couldn’t pay the expense. Others would turn to selling items or using a payday loan.

We see debt and flat incomes for 20 years adjusted for inflation as a big reason for a surge of interest in the reverse mortgage. Someone said that reverse mortgages are the last thing that your clients would ever want, and they are the first thing they need as a last resort. Such are the opposing, yet surprisingly complimentary, views of what is still for many a highly controversial topic.

What is a Reverse Mortgage?

“A reverse mortgage is a loan against home equity that doesn’t have to be repaid until you move, sell your home or die. You can receive a lump sum, a line of credit, monthly payments or a combination. To qualify, you must be 62 or older. (If the home is owned jointly, both owners must be at least 62.) The amount you can borrow is based on your home’s value, current interest rates, and your age.”

To apply for a reverse mortgage was easy prior to 2015. That is about to change for many, as new regulations go into effect in 2015 that will require individuals that opt for a reverse mortgage to have financial planner counseling.

Retirees to use Reverse Mortgage

Demand for reverse mortgages is expected to surge as greater numbers of baby boomers retire, many with not much in savings. Analysts expect boomers to retire at a rate of about 10,000 per day through 2030, according to a report by the Insured Retirement Institute. Some 59 percent of boomers expect Social Security to be a major source of their income during retirement, according to the report.

You must be at least 62 to participate. Here’s an example of a couple, both over 62 owning a home valued at $425,000 and two mortgages totaling 200,000. The maximum loan amount may be 60% or 255,000 or the maximum amount allowed under the rules whichever is lower. That’s enough to pay off existing mortgages and save $2,000 in mortgage payments, but there would be little cash available. That would leave the couple with $24,000 in savings per year less property taxes, upkeep, and insurance. That extra savings could mean the difference between just getting by and a comfortable retirement.

The reverse mortgage certainly is a viable option for some older Americans, especially if you are not considering moving. Others believe that a reverse mortgage is a little like a car airbag. It’s nice to know it’s there, but if it ever has to be used, the driver is already in trouble.

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