Reverse Mortgages Have Some Support 

When the topic of reverse mortgages was brought up in conversations with clients in the past decade, most financial planners would roll their eyes. Homeowners can get a cash infusion based on their equity and put off paying back the loan until the property is sold with the help of one of these loans. Financial advisors formerly advised customers that retirees were not the intended consumers of such products. 

As a result of new safeguards adopted in recent years, the opinions of many experts and academics about reverse mortgage loans California have shifted. To that end, many are considering how and when to factor them into their financial plans. Major changes were made to reverse mortgages in 2013 with the passage of the Reverse Mortgage Stabilization Act. Specifically, the law prevents borrowers from getting their hands on roughly 40% of the maximum loan amount for a full year after the first loan has been disbursed. Property owners now must also demonstrate that they intend to pay their annual tax and insurance charges, as per new regulations. The secondary borrower's spouse now has additional protections as well. 

Stephanie Moulton, an associate professor at Ohio State University and co-author of a study on reverse mortgages published in the Journal of Urban Economics in 2015, thinks that recent regulation revisions "could make the product safer for seniors in the future." Prof. Moulton argues that if certain changes were implemented, such as limiting the amount of equity borrowers can take up front, the default rate on reverse mortgages might be half. (In 2014, roughly 1 in 8 borrowers who obtained government insurance for their Home Equity Conversion Mortgage were behind on either their property taxes or their homeowners insurance.) 

New rules, according to Prof. Moulton, "may encourage larger banks to re-enter the market," which would increase the product's legitimacy and decrease prices. 

Professor Wade Pfau of the American College of Financial Services in Bryn Mawr, Pennsylvania, published a paper in 2015 arguing for the use of reverse mortgages as part of a retirement-income plan under certain conditions. However, he also noted the risks involved, such as spending the proceeds too quickly and suffering losses if the proceeds are invested. 

While acknowledging the risks, Professor Moulton notes that the HECM is federally insured, meaning that the government assumes a portion of the borrower's risk. As an example, she mentions the fact that HECM borrowers can never get into a negative equity position. You may rest assured that your reverse mortgage balance will never exceed the value of your house thanks to federal insurance. 

The following is a rundown of the strategies that have been advocated by financial experts for making use of a reverse mortgage. 

Benefiting from a One-Time Cash Payment: 

Professor Moulton claims that one of the most typical uses of a reverse mortgage is to obtain a lump sum payment equal to the amount of equity in a home in order to retire a current mortgage. Over sixty percent of those who took out a reverse mortgage did just that, according to her research. She suggests it's a viable option. 

According to a recent study by Harvard University's Joint Center for Housing Studies, the proportion of homeowners 65 and older who have a mortgage has more than doubled since 1992. This discovery is mentioned by Prof. Moulton. She adds that a household's monthly cash flow improves when a forward mortgage is paid off with a reverse mortgage. The effect on a family's budget would be the same as receiving a monthly annuity payout. However, borrowing a sizable sum might be fraught with peril. Harold Evensky, chairman of Evensky & Katz/Foldes Financial in Lubbock, Texas, warns against taking on excessive debt to purchase a second or vacation home. While he does acknowledge that there are circumstances that may call for such a course of action, he adds that it is not something to be undertaken without first carefully considering the potential consequences. Overleveraging, or taking on more debt than one can reasonably afford to repay, is something he stresses should be avoided at all costs. 

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