Key Points
Reverse mortgage loans are appealing to retirees looking for cash while remaining in their homes because of the turbulent markets and the hot housing market.
In the field of financial planning, reverse mortgages have gained considerable traction.
Reverse mortgages, home loans, or the idea of turning assets into cash A house model with US dollar bills on a basic balance scale shows a borrower or a homeowner turning real estate into money
Reverse mortgages have grown more appealing as a tool for older Americans who need money for retirement but wish to stay in their houses due to the erratic nature of the stock market but the continued strength of the housing market.
According to information from the U.S. Department of Housing and Urban Development supplied by service provider Reverse Market Insight, the number of Home Equity Conversion Mortgage loans increased by 26% in March. Although it decreased by 3.8% in April, the number of loans for the month still exceeded 6,000 and was higher than the recent average.
Reverse mortgage economics aren't as strong as they once were. To reduce potential losses to taxpayers, the U.S. Department of Housing and Urban Development, which oversees the HECM programme, changed the rules in 2017 by raising the mortgage insurance premium on the loans from 0.5% to 2%. As a result, reverse mortgage upfront costs increased by $1,500 for every $100,000 in mortgage face value.
However, the market environment for reverse mortgages is favourable.
If you're short on funds, here are five options to borrow money.
Even if you don't require money right now, establishing up a line of credit through a reverse mortgage on favourable terms can give you access to sizeable funds in the future. Regardless of what happens to the home's value, the line of credit will keep expanding at the rate of the reverse mortgage's interest rate. So a reverse mortgage mitigates the risk of declining home values.
If you have a portfolio of investments, you may then choose whether to sell securities or use the credit line when you need money. That might sound a little bit like market timing, but Pfau offers a straightforward guideline to help make the choice.
Sell from the portfolio if your investments are worth more than they were when you retired, he said. If not, take a loan from the line of credit for reverse mortgages.
Not all financial consultants support reverse mortgages. Only two clients have been informed about the reverse mortgage option by certified financial planner Howard Hook, a senior wealth advisor with one of those clients finally receiving a loan.
Top reverse mortgage benefits and drawbacks Pros
Borrowers can access an average of close to 60% of their home equity on highly favourable terms as either a lump sum, monthly payments, or a line of credit that carries interest only on withdrawals while interest rates are still very low and housing values are quite high.
Non-recourse loans include reverse mortgages. You can stay in the house for as long as you wish, and the terms won't alter regardless of changes in the housing market or in the standard interest rates, as long as you pay property taxes and maintenance costs. When you pass away or abandon the house, the loan is due.
The distribution of retirement benefits can be managed with flexibility thanks to a reverse mortgage line of credit. Instead of selling investments following a market decline and having to pay taxes on the proceeds, it enables a borrower to make tax-free withdrawals from the credit line.
Cons
Although reverse mortgages are more expensive than regular mortgages and home equity lines of credit, they are simpler to qualify for. The bills will look considerably bigger if you don't stay in the house for a long time due to health issues or for any other cause.
You're putting yourself up for financial devastation if you use the funds from a reverse mortgage for dubious purchases or dangerous investments. If it's your last option for getting money, you're probably leading an unsustainable lifestyle. Reduce your spending and shrink your residence, according to Hook of EKS Associates.
Property taxes, insurance, and upkeep expenses for the residence are still the responsibility of the owner. If you don't, the lender may seize the property.
Despite agreeing that the present economic climate is favourable for the product, Hook said, “I know a lot of respectable individuals who prefer reverse mortgages, but I'm still hesitant to urge consumers to take them.” You must use caution when using debt to pay for living needs or to weather a decline in the [stock] market. It's simple money, but it can also encourage undesirable habits.
When borrowers don't want to sell their investments but must pay for medical expenditures, a more expensive mortgage, or personal debt, Hook thinks reverse mortgages may be a good option. The reverse mortgage still has a significant cost and risk when everything is considered.
Although the cost is decreased by setting it up as a line of credit, Hook insisted that it was still pricey. The prices will seem much higher if you just stay in the house for a short time.
You might discover that you can't climb stairs or that you have dementia all of a sudden, he warned. The choice to reside in a home may not always be yours.
