Reverse mortgages: Making a powerful tool easy to use

By on October 16, 2018

Reverse mortgages are federally regulated. (Credit.org)

Ask any retiree to list their top concerns, and finances will be at the top.

Many retirees try to learn as much as they can about their options and financial resources, especially Social Security, private pensions, regular and retirement savings, investments and home equity.

Home equity  may be among the least publicized yet potentially important sources available to many retirees: the reverse mortgage.

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We asked two experts in the field, Geri Wenstrom, of Reverse Mortgage Funding LLC in Elizabeth City and Tony Miller, reverse mortgage lending manager for the Northeast Region of Academy Mortgage in Rockville, Md., to explain this little-known product to our readers.

We met with Wenstrom at a local coffee shop and Miller joined us via cell phone. We explored the pros and cons of tapping into home equity to supplement retirement finances.

So when does a reverse mortgage make sense as part of retirement planning? When might the product not be the right choice?

“A reverse mortgage is just one option among many mortgage choices (conventional, FHA, VA, fixed rates, adjustable rates, term loans, credit lines) and therefore, it should be presented to any qualifying borrower as just that — an option to consider,” Miller said.

It’s a very specific tool, he said. Inm most cases, at least one borrower in the household must be at least 62 although in some cases the minimum can fall to 60.

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Because of the repayment structure of a reverse mortgage, Miller said most borrowers are those who “want to stay in the home for the remainder of their life without the obligation to make a mortgage payment.”

Other reasons include those who simply want to cash out some of their equity or withdraw it to hedge their retirement funds.

Borrowers do not make payments to the lender for as long as they live in the house.

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Repayment is triggered “when a ‘maturity event’ occurs,” Wenstrom said. “The loan becomes due and payable when the home is sold, or the borrower or qualified non-borrowing spouse no longer occupies the home as their principal residence (i.e., passes away, moves out, or vacates the property for more than 12 months) due to mental or physical illness.”

Failure to pay property taxes or homeowners insurance or allowing the property to deteriorate beyond what is considered reasonable wear and tear without correcting the problem can also trigger a maturity event.

The loan principal accrues interest and when the house is vacated, the lender puts the house up for sale and uses the proceeds to pay off the principal and interest. Any proceeds collected over and above the loan repayment are paid over to the owners or their estate.

If the home sells for less than the payoff amount, the lender takes the loss and there is no recourse against the borrower.

These loans are federally regulated and were created under federal guidelines, so lenders cannot violate these basic rules.

Borrowers must take a HUD-approved instructional course from an authorized third-party that isn’t associated with the lender. In many areas, non-profit entities such as community development corporations (CDCs) handle the educational duties.

One of the reasons lenders are willing to make a loan with no repayment until a home is vacated is that borrowers can only access 45 to 55 percent of the home’s equity under a reverse mortgage, with 50 percent being the usual limit.

This provides a substantial equity cushion to the lender.

In 2008, federal regulations changed to make sure lenders conduct a financial assessment to determine if the borrower has the means to maintain taxes, insurance and upkeep, reducing the odds of a negative “maturity event.”

Reasons not to consider a reverse mortgage are any scenario where there are no borrowers 62 and older, borrowers who only need the money for a short period of time since closing costs are higher on reverses and borrowers who may need to access more than 50 percent of their available equity.

Reverse mortgages have not been pushed hard by larger banks and mortgage lenders, primarily because the products are highly specialized and regulated, and there’s more money to be made focusing on conventional mortgage products.

“A significant amount of our customers come as referrals from their financial advisers and planners,” Wenstrom said. “They understand the product, and if they see that it might be a fit for their client they send them to us.”

Both Wenstrom and Miller see that as a strong endorsement of the reverse mortgage’s value as a retirement tool.

Miller noted that regulators also added new ways to structure a reverse mortgage in 2008.

“Prior to 2008, many seniors saw a reverse mortgage as a ‘loan of last resort’ when their monthly income was no longer able to pay their bills,” Miller explained.

Today, borrowers can structure a reverse mortgage as a lump sum distribution at closing, a line of credit they can access as needed, a predetermined schedule of monthly advances to the borrower, or a combination of all three.

There is even a method where a reverse mortgage line of credit left unused, can actually have the credit limit increase over time and even exceed the original qualifying amount.

The earlier one closes on the line, the greater the potential growth and funding availability when the borrowers reach their 70s and 80s.

This is a complicated product and requires the borrower to work closely with their financial adviser and the lender to ensure they understand the risks and benefits.

A more typical and less complex scenario for a reverse mortgage occurs when the borrower or borrowers retire and their monthly income is reduced but a mortgage payment remains.

Suppose 15 years ago you obtained a 30-year mortgage for $275,000 at 4.5 percent. Your payment is $1,400 a month but now your income has been reduced because you are retired.

If your loan balance has dropped to $137,500 or less, you could borrow enough to pay off the mortgage and eliminate the $1,400 monthly payment.

If you’re on a fixed income, in essence, that option just raised your monthly income by $1,400 and you will never pay on that debt until you sell the home.

Aging in place is a popular choice for seniors wishing to eliminate or delay a move to a retirement or assisted living facility.

If your house is paid off or has a small remaining mortgage loan balance, you can use a reverse mortgage to pay for improvements such as elevators, dumbwaiters, stair climbers or remodeling options that would allow you to remain in the house, all without making any monthly payments.

You could also use a reverse mortgage to finance improvements that are more fun, such as an indoor swimming pool, cruises, or other activities without tapping into your monthly pension, Social Security or 401K distributions.

Likewise, new cars or other big-ticket items could be purchased with reverse mortgage proceeds without monthly repayment terms.

Finally, given the very real prospect that many of us will enter a long-term care facility in our later years, borrowing on a reverse mortgage can fund temporary stays for rehab needs, or longer-term says for one spouse as long as the other qualifying spouse continues to live in the residence.

If you are the sole homeowner, a stay longer than six months would be considered a triggering event, but if you borrowed and set aside the funds before entering the facility, the sale proceeds would pay off the loan and you would have funds to finance the first few years of your stay.

Finally, there is even a program where a qualifying borrower can use a reverse mortgage to make a substantial down payment on a new home with a loan product called a “Reverse Purchase”.

One consideration both lenders encouraged was for borrowers to think about communicating with their children and other heirs regarding their plans to use a reverse mortgage as it will reduce the amount of money they will receive when the house is sold and the reverse mortgage paid off.

If you think a reverse mortgage is a possible tool for you to use, check with your tax or financial adviser first and typically, they will have referral sources for you to further explore the option.

To contact those we talked with in this story:
Geri Wenstrom
HECM Loan Specialist, NMLS: 455239
Reverse Mortgage Funding LLC
905 Halstead Blvd. Suite 6, Office C
Elizabeth City, NC 27909
Branch NMLS: 1635037
252-996-0737 Direct
gwenstrom@reversefunding.com
https://www.reversefunding.com/geri-wenstrom

Tony Miller
Reverse Mortgage Lending Manager, Northeast Region
Academy Mortgage
30 W Gude Dr., Ste 210
Rockville, MD 20850
Direct: (301) 252-2121
NMLS #297063
Tony.Miller@AcademyMortgage.com
www.AcademyMortgage.com/TonyMiller

No compensation or other considerations were paid to the Outer Banks Voice by any sources cited in this article.

Comments

  • Kathy Sparrow

    I jumped through quite a few hoops 2 years ago to get a reverse mortgage. Used about $70 to put back into my home to fix everything that was wrong with it. AND then sold it for a good price and paid off the reverse loan. Worked great. I will say that I had a snooty settlement person who said she had never handled one of those and didn’t think it was a smart idea for me to do it. But it worked. It’s what I needed to make a lot of improvements to the property I wanted/needed to sell.

    Tuesday, Oct 16 @ 5:59 pm
  • Matthew Byrne

    Nice piece Russ – thanks so much!

    Wednesday, Oct 17 @ 8:20 am
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