Who Doesn’t Need a Back-Up Plan for a Secure Retirement?
Some people would have you believe that reverse mortgages should only be considered as a last resort… when you need money and have no other choice. Not only do I think that’s wrong… I also think that for today’s retirees, it’s particularly bad advice.
Some people would tell you that reverse mortgages are somehow “risky,” and I think that’s nonsense as well. In fact, I would have to say that today’s reverse mortgage, regulated by the U.S. Department of Housing and Urban Development (“HUD”), is if anything, less “risky” than any other types of mortgage you could have.
Maybe the wealthiest retirees can get by without taking out a reverse mortgage as a way to protect their financial futures, but for the rest of us… not having funds from a reverse mortgage available is what’s risky. And I’d even go one step further and say that you shouldn’t wait until you need the funds that would be available from a reverse mortgage to apply for one.
That’s right… I think it’s prudent for retirees to get their reverse mortgages in place now… well before they need the money.
Why? Well, first of all, let’s get a few things straight about reverse mortgages.
A reverse mortgage is not some risky exotic type of loan that causes people to lose their homes or the equity in their homes. In fact, a reverse mortgage is just like any other type of mortgage… you borrow some amount of money and you pay it back with interest.
The only difference with a reverse mortgage is that you don’t have to pay the money you borrow back if you don’t want to… it can be paid back after you or your spouse dies from the sale or refinance of your home by your heirs.
Secondly, reverse mortgages are “non-recourse” loans insured by the FHA, so no matter what happens to the value of your home in the future, you or your heirs can never owe more than the home is worth. And with a reverse mortgage, you still always own your home and your heirs inherit whatever equity remains after repaying whatever is owed on the reverse mortgage.
Third, and this is a very important point, a reverse mortgage is incredibly flexible… you can use it the way you want to… pay it back the way you want to… or you can leave it open like a credit line and not use it at all. A reverse mortgage is the mortgage you design to meet your specific wants and needs.
If you and your spouse are both over 62 years of age, you’re eligible for a reverse mortgage, but the amount you can borrow depends on your age and the appraised value of your home. The older you are, the greater the percentage of your home’s value you can access using a reverse mortgage, so if you open a reverse mortgage when you’re 62, but don’t use any of the money until you’re 70, the amount you’ll be able to access will have gone up significantly. And if you don’t use the money until you’re 75, the amount you can access at that time will have gone up even more.
Decades of retirement years…
If you’re 65 today, your life expectancy is more than twenty years… if you’re 80, you can expect to live another 10 years… at 90… you’ve probably still got five years to go. There’s no question about it, we’re living longer than ever before… retirement today isn’t measured in years… it’s measured in decades. And although you might be able to predict what’s going to happen over the next so many years, over decades… anything can happen… twice… and the problem is that few are prepared for it to happen even once.
Just ask yourself the question… is there any reason to believe that the next thirty years will be any calmer, more predictable, or less impactful on our lives than the last 30 years? Probably not. And the problem is that very few of us will be as able to handle the ups and downs financially, as we were during our working years.
In 2013, the average 401(k) balance for 65-69 year olds reached $136,800, but Fidelity 401(k) participants have had significant ups and downs over the past several years. For example, the average Fidelity 401(k) held just $50,200 in 2008… but was up to $77,300 this year.
Obviously, $136,800 is not a whole lot of money when looking at retirement lasting for decades… but even ten times that amount isn’t all that much over thirty or more years. Social Security will help, but as to how much… well, that’s an uncertainty too.
Mortgage lending has changed…
Prior to the financial meltdown of 2008, our access to credit was very different than it is today. Mortgages came in countless flavors, and Home Equity Lines of Credit (HELOCs) were being offered at banks as often as free coffee, and just about anyone could get a loan based on their equity in real estate, regardless of their income, expenses or credit score.
Not so today… not even close.
Today, HELOCs are rare as hen’s teeth, as my mother used to say. And even when you find a HELOC being offered today, it’s not an easy loan for which to qualify… not only do you need equity, but you also need a high credit score and sufficient income… gone are the days of asset-only based lending.
Qualifying for a reverse mortgage also changes as of 2014, and who knows what additional changes will come in future years.
For the first time ever, lenders will be required to assess a borrower’s ability to pay property taxes and homeowners insurance bills. And in some instances, lenders will require certain borrowers to set aside funds to cover property taxes and insurance in the future.
As of Jan 2014… lenders are to conduct an analysis of all sources of borrower income, including earnings, pensions, Social Security, funds held in IRA and 401(k) accounts… and credit history will also become a factor in some instances.
Lenders are also being required to consider the amounts the borrower(s) have left after normal living expenses. If a single homeowner can show $500-$600 is left after paying monthly living expenses, he or she will probably not be required to set aside a significant amount of the loan’s proceeds to cover property taxes and insurance in future years.
Without question, these new rules will hit seniors harder in some parts of the country than in others, such as in areas where homes cost less, thus making property taxes and insurance, relative to the appraised value of the property, higher in percentage terms. Of course, although it does reduce the amount of cash available through a reverse mortgage, reserving for property taxes and insurance does eliminate the potential for losing a home due to failure to pay such costs.
Waiting until you need it, means you may not be able to get it…
The bottom-line is that, when structured and used properly, reverse mortgages don’t expose retirees to risk… they protect retirees from the financial risks that accompany the prospect of retirement years that can last for decades. But it’s protection that may not be available if you wait until you need it.
What if someone were to get injured and require assisted living for most of a year before recovering to the point of being able to move back home. Without the income needed to qualify for a loan, the couple could be forced to sell their home or exhaust their savings.
Were the couple to have thought ahead by getting their reverse mortgage approved in advance of any specific need, when hit with the unexpected, the ability to access the cash from their reverse mortgage without being required to repay the loan according to anyone’s schedule but their own, could make the difference of a lifetime… it could mean saving their home during the last years of their lives together.
And what if nothing happened during their retirement years that required the couple to need the amounts available from their reverse mortgage? Well, wouldn’t that be great?
I suppose one could say that they wasted the costs associated with originating the reverse mortgage they never needed. But, the costs are regulated by HUD, and can be financed into the loan, so it’s not like a lot of cash was needed… and I think most would consider the total costs, which are capped at $6,000, an inexpensive insurance policy.
So, even if you don’t have the need for the funds that would be available from a reverse mortgage today, you should still want to carefully consider the protections afforded by having those funds available… and what would happen if you didn’t.
There’s simply nothing that will do what a reverse mortgage can do. And in today’s lending environment, it’s a product that fills a gap for retirees that remains unfilled for everyone else.
To discover how a reverse mortgage would specifically impact your future, let Impac Mortgage develop a real life personal plan for your consideration.
It’s the best way to make the best decision for you, because it provides you with the all the facts, the pros… the cons… the risks and the potential rewards of using a reverse mortgage as a financial planning tool, so if a crisis strikes… you’ll be prepared and protected.
Impac Mortgage has offices in 37 states, and an entire division dedicated specifically to reverse mortgages, headed up by Impac Mortgage’s Senior Vice President, Richard Johnson, and staffed by reverse mortgage specialists ready to help you fully understand how a reverse mortgage could make your future much more financially secure… just in case.
To learn more about Impac Mortgage, read their amazing and unique story: “One Bank Did Right by Homeowners, & Shareholders.” And to hear my interview with Impac’s CEO, Joe Tomkinson on a Mandelman Matters Podcast, click here: “Discussion Solutions to the Foreclosure Crisis with Impac Mortgage CEO Joe Tomkinson.”