Reverse Mortgages Provide Relief for Retirees
With investment portfolios taking a major hit from the COVID-19 pandemic, many are seeking alternative sources of income.
Retirees, in particular, who count on investment income to pay the bills are reluctant to sell any of their portfolio at this time. As long as they don’t sell, they won’t “lose” anything. But that means they are stuck with little to no income.
One option retirees are turning to is a reverse mortgage. New applications for home equity conversion mortgages, the most common reverse mortgage, were up 15% in March and 50% year-over-year.
What is a Reverse Mortgage?
A reverse mortgage gives older homeowners the option to take out some of their home equity as a loan. This is available to homeowners over the age of 62. Repayment is not necessary as long as the homeowner remains in the house.
How much you are able to borrow depends on a few factors: age (older equals more borrowing capabilities), the interest rates, and the value of your home. The maximum amount that can be borrowed is $765,600 regardless of your home’s value.
There are a few additional conditions. If you still have a mortgage, a portion of the loan must be used to pay it off. Homeowners must also stay current on property insurance, taxes, and home maintenance.
It is important to remember that the amount received comes as a loan. Repayment might not be necessary, but interest will accrue, and the amount of the loan will grow.
There are three ways you can receive your loan:
Lump sum: Discouraged out of fear that the money will be spent too quickly.
Annuity: Regular monthly payments based on actuarial estimate.
Line of credit: This is the most popular option. It allows you to earn interest on your loan until you decide to access its value. This means you could make some additional money off your loan while you wait.
Concerns with Reverse Mortgage
One of the major concerns with reverse mortgages was highlighted above: lump sum payments being spent too quickly to cover insurance, taxes, and maintenance.
This issue has been addressed. Borrowers are now only able to receive 60% of their loan value in the first 12 months. Lenders are also required to assess the financial situation of borrowers, and borrowers are required to go through a counseling program that they have to pay for themselves.
However, there are still some concerns with reverse mortgages. Since all borrowers are now required to pay a 2% mortgage insurance premium upfront, the cost of reverse mortgages has gone up. Borrowers have only been able to get 58% of their home value, on average, compared to 64% in years past.
Advisors tell their borrowers to proceed with caution. High costs and lower payouts are making reverse mortgages a last-ditch effort for those in financial need.
If you are wondering how a reverse mortgage might help you, let our team help you out. For legal guidance, get in touch with a real estate attorney at Lee Scott Perres, P.C.
