Opinion: Reverse mortgages are mostly misunderstood – they can offer older people a lifeline as markets crash

If they own stocks or bonds, they may not want to sell with both markets collapsing simultaneously. Or they may be out of options and their home is their only valuable resource.

This is where a home equity conversion mortgage comes into play. Most people think of reverse mortgages, as they’re commonly called, as the last attempt to stay in your home when you’re out of money in retirement. But even before they run into financial difficulties, some seniors use these loans as a financial planning tool, so they can leverage the equity in their home on their own terms.

If you are over 62 and have the equity in your home, you can use a reverse mortgage to pay off your underlying main mortgage using the equity built up in the property and then borrow a portion of the value net remaining, either as a monthly payment, lump sum or line of credit.

Federal regulations require credit counseling before you can borrow, in which a loan expert explains the complicated terms. You should always be proactive about knowing your rights and following up on any investigations of bad actors in the industry, so check with the Consumer Financial Protection Bureau.

Here’s how reverse mortgages work: If your home is worth $430,000, which is the average for such loans according to the National Reverse Mortgage Lenders Association, and you have $100,000 left on your mortgage, you could have access to approximately $150,000. (You can run your own numbers with an online calculator.) If you stay in the house for the average term of a reverse mortgage contract, which is seven to eight years, and ultimately sell for $500,000, you walk away with the money. left, depending on fees and taxes.

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Many people think they have to give up title to their home or they could lose money if their home loses value. But that’s not the case either.

“You don’t give up the house,” says Wade Pfau, the author of a book on reverse mortgages. “If you sell and pay off the balance of the loan, whatever is left is yours. If the value of the loan exceeds the sale price, you are not required to repay more.

There are disadvantages. One is the high fees. Closing costs are higher than with a home equity line of credit or cash refinance, and there are ongoing fees while you keep the loan active. Your interest rate may also be higher than that of conventional loans.

Another possible risk is that even without having to make a mortgage payment, your financial situation could still be dire. If you can’t pay your taxes and insurance, you could be subject to foreclosure.

“You’re just going to end up in the same place,” says Genevieve Waterman, director of economic security for the National Council on Aging, which publishes a resource guide for seniors on reverse mortgages.

‘Where are you going to live?’

So far in 2022, reverse mortgages are increasing, with more than 60,000 processed, compared to 49,000 the previous year, according to data from the United States Department of Housing and Urban Development compiled by the NRMLA. During the Great Recession, these mortgages numbered more than 100,000 a year as economic conditions deteriorated.

This may be because seniors facing high inflation and declining investment markets are caught in a bind. If they are struggling to meet their expenses and wish to reduce their housing costs, there are few options cheaper than their current housing situation.

“Where are you going to live?” asks Lori Trawinski, director of the AARP Public Policy Institute, which also offers help for seniors considering reverse mortgages.

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Unless you’re moving in with a relative, wherever you go, there’s always that housing payment, and it’s likely to increase over time, unless you stick with a rate mortgage. fixed.

Turning to a home loan can be an option, and some lenders allow you to take out up to 80% of the equity in your home. But you would still have your primary mortgage payment plus an additional payment for the home equity line.

If you’re selling direct, in addition to the dilemma of where to live, you’ll also need to decide how to invest the proceeds cautiously so you don’t run out of funds.

Use your home as leverage

When Paul Dandrea, a 76-year-old retiree, faced this decision a few years ago, he ruled out all these other options and decided to go with a reverse mortgage. His goal was to buy in Arizona before selling his house in North Carolina. So he took advantage of a home he knew he would eventually sell and moved the assets into what he hopes will be his long-term retirement home.

“It’s a smart planning tool if you get your hands on equity, knowing you don’t have to pay it back until you’re ready to sell your home,” he says.

It was not a plan he jumped into lightly. Dandrea looked at all the data and worked years in advance to put everything together, qualifying well in advance. When he needed money, it only took five days before he got the money. He even ran the idea through his financial adviser, Adam Vega.

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“He went out of his way to research it and introduced it to me and it made sense,” says Vega, who was initially skeptical of reverse mortgages but now sees them as useful for some clients.

Dandrea ended up selling her primary residence after a few years and dissolving the reverse mortgage. He ended up thinking it was worth paying for so he could make financial moves whenever he wanted.

“It served its purpose, and the big plus was that I didn’t have any monthly payments,” he says.