Nov 1, 2018
By John Bast
While some say the only certainties in life are death and taxes, it’s a fact that our general population is also living longer than ever before. While this should be a positive thing, living longer can become a struggle, or otherwise boring existence, for those who haven't budgeted enough for unexpected expenses or the enjoyable life they had hoped to lead.
But it doesn’t have to be this way.
You’ve probably heard about reverse mortgages. Many customers have told me that these home loans just aren’t right for them, but the reality is that they can be a major financial windfall for seniors in multiple situations.
Decades ago some would equate reverse mortgage loans to be synonymous with what the unfortunate have to rely on, eventually leading to them losing their home. But that was a different time.
Similar to other mortgage products, there are multiple types of reverse mortgage options, but for this article, I’ll focus specifically on the FHA Home Equity Conversion Mortgage or HECM. These are the only reverse mortgage products insured by the U.S. Federal Government, and offer great financial benefits to home owners from almost every walk of life.
As the name hints, they’re the opposite of a traditional mortgage. Instead of taking out a loan for the purchase of a home, a reverse mortgage allows homeowners to leverage the financial equity they have in their home and turn it into cash.
There are some requirements the borrower must meet to qualify for these loans, including being at least 62 years of age, as well as have a moderate to zero balance on their existing mortgage.
A common misperception with HECM loans is that they’re the last hope for destitute seniors afraid of losing their home. This could not be further from the case as I’ve seen first hand here in Sonoma County.
You’ve probably heard the term “aging in place” in the news. It’s used to describe the trend towards seniors who want to live in their home for as long as possible.
When it comes to retirement, unexpected situations arise. Illnesses can occur that leave us with the need for additional medical care, or unforeseen repair work may be required for our homes. While the funds received from HECM loans can be used to cover these costs, they could also be used for so much more.
For example, I’ve had seen people take out reverse mortgages so they could splurge more on vacations with their family. These loans could also be used for non-essential home improvements too, such as a new kitchen, or helping a family member pay for college. What you do with the funds from a reverse mortgage is completely up to you.
There are some major misconceptions when it comes to HECM loans. And while the money you receive from an HECM loan won’t be taxed, you must still pay your home’s property taxes, homeowners insurance, and similar fees such as HOA dues if you live in a condominium. However, you can use the funds from your HECM loan to pay for these items and as long as you keep current with them, you can live in your home worry free.
Another big fear many have regarding reverse mortgages is leaving their heirs in debt. That simply isn’t true. When the homeowner passes away, their heirs have the option of paying back the balance on the loan or selling the home in order to pay it off.
If the home owner lives well beyond life their expectancy and property values stopped increasing over time, or the funds received from the loan were to exceed the current value of the home, the heirs would be able to purchase the home for 95 percent of the current value. That percentage holds true for if you decide to sell the home yourself as well.
When you pass, if your heirs cannot afford to pay back the loan, but still wish to purchase the home, they can take out a traditional mortgage to cover the difference.
If the home is worth more than the balance of the loan, the equity is transferred to your heirs.
What is the goal of a 401(k), retirement account or your stock portfolio? At a certain point, most of us stop putting money into retirement accounts and start spending it on ourselves. That’s why we have them! However, investment portfolios can decline unexpectedly. The stock market can crash. Many retirement specialists have gone on the record as saying a properly utilized HECM loan can be a great buffer to have if your investment portfolio were to decline.
Think of the equity you have in your home in a similar way to a retirement or savings account. You can’t take the equity you’ve built in you home with you when you pass. And many seniors would rather use their savings for their own personal enjoyment now, as well as their family and friends around them.
Regardless of if you need the funds for medical expenses, household emergencies, or simply to take some nice vacations, a reverse mortgage through the FHA’s HECM may be a very smart move.
John Bast (NMLS #957180) is a mortgage loan originator with HomeBridge Financial Services, Inc. (www.homebridge.com), based in its new Sonoma County branch. A graduate of Sonoma Status University, he has more than 40 years of experience working in the mortgage industry and has lived in the area since 1976. Area residents interested in discussing reverse mortgage or traditional home loan options can contact him directly by calling (707) 934-8994, or by emailing John.Bast@homebridge.com.
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