Reverse Mortgage Basics
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Hello, and welcome to Your Money 2.0. I’m Justin Lally, a reverse mortgage specialist at Cambridge Credit Counseling Corp. Over the next 20 years, over 70 million baby boomers will be entering a retirement, and if current statistics are correct, a large percentage of these individuals are woefully underprepared. According to reports from Reverse Mortgage Magazine, only 38% of baby boomers had saved enough to get them through retirement. Although that statistic in and of itself is unsettling, a review of the overall retirement landscape is even more startling. Approximately 78 million Americans have no retirement savings plans. The sad fact is social security will do little to accommodate the financial circumstances of retirees, and many may need to rely on the equity in their home for survival.
Some of you may be saying, “That’s what Social Security is for.” Well, Social Security was never intended to be the sole source of income for retirees. Social Security was created to provide retired persons and with the resources to cover basic expenses. When it was established, the average life expectancy was 65 years old; however, the average lifespan for Americans has increased by almost 30 years. Needless to say, this has compromised the effectiveness of Social Security. The average senior citizen receives $2,000.00 a month for Social Security; however, their median annual expenses are $36,000. The math alone tells us we must do far more to build appropriate retirement funds.
For those of you who are retired, or will soon be, there are financial tools available to help you if your retirement savings are lacking. A reverse mortgage enables homeowners who are 62 years or older to convert part of the equity in their homes to subsides retirement. The unique aspects of a reverse mortgage can provide much needed funding without having to sell the home, transfer title, or take on a new monthly mortgage payment. In essence, a reverse mortgage is a regular mortgage reversed – instead of the homeowner making payments to a lender; they receive money from the lender. Reverse mortgage loan advances are not taxable, and generally don’t affect your Social Security or Medicare benefits.
There are three types of reverse mortgages homeowners can choose from, each with its own purpose. A Single-purpose reverse mortgages is generally the least expensive, and restrictive option. These mortgages are offered by state and local government agencies and nonprofit organizations. As is indicated by their name, this type of reverse mortgage can be used for only one purpose, which is stipulated by the lender. Homeowners can also apply for a Home Equity Conversion Mortgages (HECMs) which are backed by the U. S. Department of Housing and Urban Development (HUD). And finally, proprietary reverse mortgages are private loans that are backed by the companies that develop them. The proceeds from a HECM or proprietary reverse mortgage can be used for multitude of options including supplemental retirement income, home repairs, meeting healthcare needs, preventing foreclose, and so on.
Before applying for a HECM, and some proprietary reverse mortgages, you must receive a counseling session as a condition of financing. The counselor must review additional options available to the homeowner, including home equity conversion options currently available. Furthermore, the counselor will discuss the financial implications of entering into a reverse mortgage, including tax consequences and the impact of a reverse mortgage on the homeowner’s estate. Most counseling agencies charge around $125 for their services, and the fee can be paid from the loan proceeds.
Just how much can a reverse mortgage add to your retirement portfolio? The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA's mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, and the lower the interest, the more you can borrow. To learn more about reverse mortgages, please visit www.aarp.org/revmort, a website established by AARP’s Reverse Mortgage Education Project or contact your local HUD Certified Housing Counseling agency. Well, that’s it for this edition. As always, we welcome your feedback and ask for your thoughts and suggestions by e-mailing us at [email protected]. Thank you for watching. Until next time, I’m Justin Lally for Cambridge Credit Counseling.