Answering your questions about reverse mortgages for mature homeowners
Understanding Reverse Mortgages
by Gary Foreman
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You see the ads for reverse mortgages on TV. But, if you're unfamiliar with how a reverse mortgage works, it sounds too good to be true. So to help us learn more about reverse mortgages, we turned to Buck Wargo, senior editor of Now It Counts / NiC Magazine with expertise in money matters, social security, Medicare, financial planning, and retirement strategies.
Q. You're a proponent of reverse mortgages. What makes them so attractive in your view?
A. It's just a mortgage loan, but one with the most flexible repayment terms of any loan out there, including no requirement to repay until both spouses leave the home. As such, it can significantly improve the cash flow position of Americans 50+ who still owe on their home, plus allow them to access their equity to provide a better quality of life in retirement.
It's important to remember that the point of buying the home in the first place was as an investment, but in the current world of income-based and no asset-based lending, it's about the only way to utilize the equity you've built outside of selling the home. A reverse mortgage is the best of both worlds in that the retiree can remain in the home until they pass, yet still use their equity to fund their retirement.
Further, any additional home appreciation or remaining equity still belongs to the borrower or their heirs. If we experience another housing crash, the heirs can purchase the home for 95% of market value at the time of repayment, even if the borrower owes more than the home is worth.
Q. Many boomers are skeptical of reverse mortgages. Why do you think that is?
A. There have been many uneducated stories about Americans 50+ losing their home to foreclosure "because" of a reverse mortgage. The fact is these people failed to pay their property taxes, which is a requirement of a reverse mortgage. If they could not pay their taxes with no mortgage payment, the likelihood they couldn't pay their taxes while having a monthly mortgage payment with a traditional mortgage is all but certain. The product is grossly misunderstood, but it's about the only thing Congress can agree unanimously on!
Q. If I wanted to get a reverse mortgage, what should I look for in a mortgage company?
A. As with any mortgage, service, rate, and fees are important.
Q. What choices do I have on payout options? And, how do I decide which one would be best for me?
A. There are two types of reverse mortgage. The fixed rate allows you to take your equity in a lump sum, while the adjustable rate reverse mortgage uses your equity like a line of credit with more flexibility. It allows you to take a lump sum, in money payments like an annuity, or just when needed. The adjustable reverse mortgage also allows a borrower to take a bigger percentage of equity as the borrower ages.
Q. Should boomers tell their children about plans to get a reverse mortgage?
A. Yes. The challenge for Americans 50+, however, is when heirs feel entitled to the home upon their parents' death, and pressure them not to use their equity to improve their retirement and leave it to the heirs instead. So many 50+ Americans have not saved enough for retirement, so a reverse mortgage is one of the only vehicles available to improve the quality of life for a retiree.
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter or visit Gary Foreman on Google+. Gary is also available for audio, video or print interviews. For more info see his media page.
Take the Next Step:
- Use this tool to maximize your retirement by determining the best age to take your Social Security benefits. Don't leave thousands on the table by taking Social Security at the wrong time.
- No need to worry about a reverse mortgage leaving you homeless if you take these steps to protect yourself!
- Visit the TDS library for more on reverse mortgages.
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- Determine if debt could derail your retirement and what you can do about it now. Our checklist can help you. Afterall, one of the most important ingredients for a comfortable retirement is to be debt free when you retire.
- Find information geared specifically for Baby Boomers in The Dollar Stretcher section dedicated to your financial issues. If you're over 50 your financial needs are different. And so are your questions.
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