Reverse mortgage. Just a few years back this term brought fear and trembling. And for many, the reputation reverse mortgages had for being an unwise financial decision has lingered.
But now, thanks to new legislation and some creative uses, a reverse mortgage is a viable – even desirable – option for some senior citizens.
We recently sat down with a true expert in the field, Barbara McDowell, a reverse mortgage specialist for Bank of the Pacific, who brought us up to date on today’s reverse mortgages and what kind of situations and people may be a good fit for them.
“I am a matchmaker,” said McDowell. “I want to make sure to match the resources for the person and for some a reverse mortgage is a great match.”
WHAT IS A REVERSE MORTGAGE?
In a typical mortgage, the bank gives you a loan so you can buy a house. You then make monthly payments to pay off that loan, gaining more “equity” or percentage ownership of the house as time goes by.
With a reverse mortgage, you must have significant equity in your house to begin with and then enter into a loan agreement with a bank or other lending institution. Your eligible proceeds will be used to first pay off any existing liens. The remaining eligible proceeds can be set up in a monthly payment plan, received in a lump sum, in a line of credit or a combination of these. “This gives you access to your home equity today when you need it most,” McDowell explained.
She gives a more precise definition of a reverse mortgage: “A reverse mortgage is a financial tool that turns your home equity into cash which can be used for any purpose you decide. Unlike a traditional mortgage, you do not make monthly payments. And, no repayment is due as long as you live in the home, pay your taxes and insurance and maintain the home according to the Federal Housing Administration (FHA) requirements.”
We bet you already have tons of questions. We will work to answer them not only in this column but in subsequent columns in this series.
WHY REVERSE MORTGAGES NOW?
One reason reverse mortgages have come to the public’s attention nowadays is that more financial planners are recognizing them as a potential tool for their clients, McDowell said.
When helping plan for retirement, typically financial planners have used the picture of a stable, three-legged stool with savings, social security and pensions making up the three legs, McDowell said.
“Because fewer and fewer people have pensions now, the planners were finding many people who didn’t have that third leg but were house rich and cash poor. That led them to consider a way to use the equity from their homes as a source of income in retirement,” she said.
Another reason why reverse mortgages have come back into a positive light is that some recent legislation has made them a more viable, safer option, both for the individual and for the lending institution.
REVERSE MORTGAGE HISTORY
McDowell said that conventional wisdom traces the first reverse mortgage back about 100 years to England when a widow approached her bank with the idea. She owned her house but lacked cash. So, she went to her bank and suggested that the bank give her money each month and let her live in her house and the bank would own the house when she died. It’s been used in various forms since then.
However it was in the 1960s and 1970s in the United States that it understandably got a bad reputation.
There simply was not enough regulation which led to all sorts of horror stories of people being forced out of their home or of heirs inheriting debt if the house went down in value, McDowell said.
Or conversely, where lending institutions were left in a negative situation having paid out more than the house was worth.
“It was like the Wild, Wild West and there was no sheriff in town!” McDowell said.
In 1988, President Ronald Reagan signed into law the FHA-insured Home Equity Conversion Mortgage (HECM) as part of the Housing and Community Development Act of 1987. This law meant that neither the lender nor the homeowner would suffer if the reverse mortgage went awry. Instead, HUD would step in.
Then in 2014 revisions were made to the law to further tighten it up so that the non-borrowing younger spouse or partner would be protected.
The very next year, March 2015, FHA implemented new guidelines that require reverse mortgage applicants to undergo a financial assessment. Even though seniors do not have to make a mortgage payment, FHA wants to make sure they had the financial ability and willingness to keep up with property taxes, homeowner’s insurance and home maintenance, which are requirements of the loan.
MORE TO COME NEXT WEEK
So we hope we’ve left you with an overview of what a reverse mortgage loan is, why it’s becoming more popular again and how it has become safer recently due to new regulation.
Next week we plan to clarify who is eligible for a reverse mortgage and tell you five things you should consider before entering into one.
In the meantime, if you have questions, contact Barbara McDowell at Bank of the Pacific (360) 441-5794.
Dave Murnen and Pat Beaty are construction specialists at NeighborWorks® of Grays Harbor County, where Murnen is the executive director. This is a non-profit organization committed to creating safe and affordable housing for all residents of Grays Harbor County.
Do you have questions about home repair, renting, remodeling or becoming a homeowner? Call us at 533-7828, write us or visit us at 710 E. Market St. in Aberdeen.