When is a Reverse Mortgage the right choice for borrowers?
Reverse mortgages are also known in the industry as Home Equity Conversion Mortgages (HECM) and they allow homeowners aged 62 and older to convert the equity in their home into tax-free income (primary residences only, please). Retirees often rely on fixed-income sources once they’ve left the workforce and a reverse mortgage can reduce their risk of outliving their savings and investment account balances.
In the past, these types of loans were relatively expensive and only made sense if the borrower was facing financial hardship. This is no longer the case however, and the Financial Industry Regulatory Authority Inc. (FINRA) notes that reverse mortgages can help seniors manage their finances if used prudently and judiciously. Though they have suffered from an image problem for a while, due in part to cheesy celebrity endorsements and questionable sales tactics, reverse mortgages are a valuable tool for improving retirement security.
Once the reverse mortgage is in place, the available line of credit continues to increase even if the underlying value of home doesn’t. Unlike a conventional mortgage or home equity line, a reverse mortgage can’t be frozen, reduced, or cancelled due to external economic conditions. Another key difference is that borrowers aren’t required to repay the loan until they no longer use the home as their primary residence, i.e. selling the property, moving to a nursing home or extended care facility permanently, or passing away. According to the Department of Housing and Urban Development, “When the home is sold or no longer used as a primary residence, the cash, interest, and other HECM finance charges must be repaid. All proceeds beyond the amount owed belong to your spouse or estate. This means any remaining equity can be transferred to heirs. No debt is passed along to the estate or heirs.”
There are many consumer protections put into place by The Reverse Mortgage Stabilization Act of 2013, intended to ensure that borrowers don’t deplete their equity too quickly and shields spouses who aren’t old enough to be co-borrowers from having to leave the home if their older spouse dies. Additionally, every potential borrower is required to attend special HUD counseling in order to ensure that they fully understand the details of their reverse mortgage.
From a capital markets perspective, equity release products like reverse mortgages are in demand as the population ages with relatively high levels of home ownership. Since the HECM is considered a non-recourse loan, lenders can take on mortgage insurance premiums in order to ensure that they don’t lose money by having to pay a borrower more than their home might be worth. Certain types of HECM are even backed by the FHA, solving some persistent securitization issues that led to higher rates and fees in the past.
Another under-realized benefit for lenders and the housing market as a whole is that Reverse for Purchase HECM loans have the ability to reintroduce older Americans to the potential home buyer pool in a big way. By lowering the barrier of having to qualify for a conventional loan based on their reduced retirement income, seniors can choose to downsize, relocate closer to family, or find a more accessible home. These are borrowers who would have been shut out of the market otherwise due to conventional underwriting guidelines on debt-to-income ratios.
Ultimately, reverse mortgages are one more useful tool that lenders can educate themselves and their clients about and decide together if it makes good financial sense. However, if they qualify for a conventional mortgage often times they may be better off with that product vs a Reverse Mortgage.
PerfectLO’s loan application software works for all mortgages including reverse and HELOC’s. To find out more on how our software can streamline your process contact us at https://www.perfectlo.com/ or firstname.lastname@example.org 800-277-1687.