As baby boomers retire at the rate of 10,000
per day, many of them are woefully underfunded for their future retirement
needs.
While reverse mortgages have gotten a bad rap over the
last decade, the product has changed and become more regulated. Reverse mortgages are now gaining a lot
of attention as a viable option for retirement income.
Most people tend to underestimate their life
expectancy, save less than they should and fail to consider how much health
care might cost in retirement, says David W. Johnson, associate professor of
finance at the John E. Simon School of Business at Maryville University in St.
Louis.
"Although we are living longer, we are also
experiencing more health issues with our increased life expectancy,"
Johnson says. "The typical 65-year old couple will need $305,000 to cover
out-of-pocket health care costs over their lifetime. Most people have not
planned for these type of expenses. Increased life expectancy and unexpected
expenses increase the possibility of outliving your assets."
As baby boomers move into retirement without
sufficient income sources, many Americans are going to be unable to meet their
basic financial needs in retirement, says Jamie Hopkins, associate professor at
The American College of Financial Services in Bryn Mawr, Pennsylvania, and
co-director at the New York Life Center for Retirement Income.
"This retirement income shortfall is nothing less
than a crisis facing the United States," Hopkins says.
Reverse mortgages are another tool in the retirement toolbox
that could offer seniors cash flow needed to cover living costs. Admittedly,
Americans have a strong negative bias toward reverse mortgages, Hopkins says.
Investors in their 50s should make critical portfolio
preparations.
"Much of that negative bias is rooted in
misconceptions and issues with bygone reverse mortgage issues. The reverse
mortgages of today are not the same as reverse mortgages 10 year ago. As such,
reverse mortgages deserve a second look today," Hopkins says.
"Reverse mortgage loans are one of the most
misunderstood financial products in existence," Johnson says.
One of the most common misconceptions is that the bank
will own your home if you take out a reverse mortgage, says Reza Jahangiri,
chief executive officer at the American Advisors Group in Orange, California.
"In actuality, with a reverse mortgage loan,
borrowers retain ownership of their home, as long as they stay current on their
property taxes, homeowner's insurance and otherwise comply with the loan
terms," Jahangiri says.
"I believe in the product enough that I
recommended a reverse mortgage for my own parents. I have seen firsthand how a
reverse mortgage made a difference in the quality of their lives during retirement,"
Johnson says.
The market has become simplified in recent years. The
Home Equity Conversion Mortgage is used for nearly all reverse mortgages,
Hopkins says. It is essentially a government loan sold by private companies.
"The HECM is extremely well regulated. However,
that does not mean there are not differences between companies," Hopkins
says. "You should still shop around for the best rate, lender, service,
and fees."
For most seniors, the majority of their wealth is
stored in their home, which is not a very liquid asset. A reverse mortgage is a
way for homeowners to unlock some of the equity in their home without having to
make monthly mortgage payments.
Who is eligible? To be
eligible for a Home Equity Conversion Mortgage, you must be a homeowner 62 or
older, own your home outright or have a low mortgage balance that can be paid
off at closing with proceeds from the reverse loan. You need to have sufficient
financial resources to pay for property taxes and insurance, and you must live
in the home.
"The loan becomes due and payable when the last
remaining homeowner leaves the home permanently," Jahangiri says.
A reverse mortgage is a non-recourse loan, as the home is the only collateral that can
be used to repay the loan balance.
"This means that if the sale of the home does not
cover the entire loan balance, then FHA pays the difference, not the borrower's
family," Jahangiri says.
Each stage of retirement makes new demands on your
portfolio so you don't run out of money.
How much could a borrower expect
to receive? "Depending on their age, homeowners typically can tap
between 50 percent and 75 percent of the home's appraised value, with a maximum
loan limit of $625,500. The older the borrower and the lower the interest rate,
the higher the available loan amount," says Tom Dickson, national leader
financial advisor channel at Reverse Mortgage Funding in Bloomfield, New
Jersey.
Another option that's growing in popularity is one
where a borrower takes out a reverse mortgage standby line of credit, Jahangiri
says. "This is a great option for borrowers who aren't
interested in tapping their equity unless an emergency arises or when they feel
the funds are needed," he says.
Tapping into your home equity through a reverse
mortgage HECM line of credit can be an effective way to avoid selling your
investments when they drop in value, Hopkins says.
"Let's say the market drops 30 percent next year.
Would you rather sell your stocks that are down 30 percent to get your
retirement income or would you rather borrow from your home equity at 3 to 4
percent interest? The answer is clear," Hopkins says. "You would be
much better off using your home equity in a down market year. Doing this could
substantially increase the sustainability of your retirement portfolio and help
make your money last for a lifetime," Hopkins says.
"As home equity is used, fewer assets may be
available to leave to your heirs," Dickson says. "It should be noted
that you can still leave the home to your heirs, but they will have to repay
the loan balance." Just like any other financial product, it is important
to educate yourself before you sign on the dotted line and it can pay to shop
around.
There are about 10 reverse mortgage companies that do almost all the
business in the industry, Hopkins says.
"Just like with a traditional mortgage you need
to shop around," he says. "LendingTree.com can allow you to do that.
Check out at least three reverse mortgage companies before moving forward with
one."
