What is a Reverse Mortgage?

Few people want to leave home when they start to need help, but feel they must if they do not have the resources to bring some help in. I myself have been weary of reverse mortgages until recently, when Shelley Giordano, Chair of the Funding Longevity Task Force at the American College of Financial Services in Washington, D.C. said, “Research by retirement income experts has demonstrated that the thoughtful, conservative use of housing wealth in retirement contributes to greater portfolio resilience.  For example, replacing a traditional mortgage with a reverse mortgage reduces the danger of mandatory withdrawals in bear markets. Or substituting draws from a reverse mortgage instead of from the portfolio, in bear markets, protects the retirement nest egg against premature depletion of the retiree’s nest egg.”

I reached out to my network and three separate colleagues suggested I speak with Ken Updegrave, a Home Equity Conversion Mortgage Specialist working for Retirement Funding Solutions.

1. What is a reverse mortgage?
   In very simple terms, it is a home equity loan designed to give older homeowners access to that equity with very flexible options on withdrawing that equity and without creating a burden to repay loan withdrawals until all of the borrowers no longer reside there, have passed away or have decided to sell the home. The amount that can be loaned is determined by a formula based on the home’s appraised value, the youngest borrower’s age, and current interest rates.
2. What are common misconceptions?
   The most common misperception is that the lender owns the home. In fact, it is just like any other mortgage where the borrower retains title to the property and there is a lien attached to the property for the mortgage. The other main misperception is that the borrower’s heirs will be left the responsibility for paying the debt. There are a few options on how the loan can be satisfied when the borrowers no long reside there.  In most cases, the borrowers’ estate would sell the home and pay off the Reverse Mortgage, just as they would with any other mortgage.  If the heirs want to retain the home, they have the option of repaying the loan and keeping the home.
3. When (under what circumstances) would someone decide to pursue a Reverse Mortgage? And where? (Do banks offer these?)
   Housing wealth is a significant portion of many peoples' financial picture as they enter retirement. They have built that wealth over many years and the Home Equity Conversion Mortgage (HECM), the Reverse Mortgage insured by FHA, gives them options on using that housing wealth to create better outcomes for themselves. Most banks do not offer them.
4. What are the benefits of this option?
   Flexibility! Loan proceeds can be received as a lump sum, regular monthly payments, as a Line of Credit or a combination of any or all of those options. Borrowers can choose to make payments of principal and interest, partial payments, or make no payments until the end of the loan.  Borrowers have no restrictions on how the proceeds can be used.  They can buy a new home using a HECM, pay off an existing mortgage, improve their home for aging in place, protect their investment portfolio in down markets or pay for medical expenses or caregiving needs. If the borrower is looking for a Line of Credit, HECMs were designed specifically for seniors and carry certain advantages over HELOCs. HECM financial requirements are less restrictive for a retiree than a HELOC would be because the loan does not require monthly principal or interest payments. Most HELOCs will require a monthly payment during the draw period and then an increased payment once it resets. Unlike a HELOC, a HECM line of credit will never be frozen or reduced, even if the property value decreases. Perhaps the most innovative aspect of the HECM is the line of credit growth feature that applies to the unused portion of the LOC and increases the amount you can borrow over time.
5. What are the pitfalls?
   The HECM program has many consumer protections built in to the guidelines, from limits on origination fees to required pre-application counseling. Because of the features of the loan and the borrower protections of having a non recourse loan, meaning they will never owe more than the value of the house, the costs to obtain a HECM, while regulated by FHA, are higher than conventional mortgage loans and HELOCs because of the FHA insurance. Borrowers really need to consider how long they can remain in their homes because short term scenarios don’t provide enough time to spread those closing costs out very well. Short term scenarios are better served with a traditional HELOC in most cases if the borrowers will qualify.
6. We hear lots of stories about elders who have been taken advantage of by brokers. What advice would you give on how to find an ethical broker?
   Reverse mortgage lending is a specialized field and most borrowers prefer to work with a local lender. A state by state list of lenders who are members of the National Reverse Mortgage Lenders Association and who are bound by their Code of Ethics & Professional Responsibility can be found at www.reversemortgage.org Interview a couple of locally based lenders and find someone that you can work with and don’t be afraid to comparison shop lenders for the best option for you
7. What are common terms? What is a "good reverse mortgage plan?"
   There are both fixed rate and adjustable rate options available and a “good reverse mortgage plan” really depends on what the borrower is trying to accomplish and the suitability of those options to their individual needs.
8. What are red flags?
   Lenders that encourage borrowers to take out big lump sum draws that they don’t have an immediate need for. Borrowers should have a plan on how to use their HECM proceeds and not draw them until they are actually needed.
9. Any other advice that a potential client in crisis might not know to do?
   As with anything else the more people can avoid crisis situations by pre-planning the better off they are. However if one finds themselves in that situation don’t let a lender pressure you to make a decision without fully understanding how the program works. Between working with an ethical lender and the pre-application counseling you should understand what you are trying to accomplish and how the HECM is going to help you get there.
10. Can you please recommend two other local lenders?
    I recommend Ron Heath, who also works with Retirement Funding Solutions, and Lance Canada, with Victorian Finance.