For many homeowners, reverse mortgages can improve their quality of life. But is it the right fit for all clients and prospects? And how will you know if it's not?
This service allows homeowners who are age 62 or older and who have equity in their primary residences to borrow against this equity.
The proceeds from such a loan can pay for any expenses they may have, such as purchasing an insurance policy, financing home repairs, paying off credit card and mortgage debt, or even buying a second home or taking a vacation.
A reverse mortgage offers many advantages to homeowners, including:
o They never need to make payments on the home
o They never need to give up their property title
o They can live in their house for as long as they want
But is it suitable for everyone who qualifies? Every case is unique, but there are specific situations where a reverse mortgage is not the best choice, such as the homeowners planning to live in their house for only a few more years or the homeowners wanting to leave their house or its entire equity to their families.
Borrowing the money
The closing costs for a reverse mortgage can be high -- in fact, they can run up to 5 percent or more of the value of the house, subject to the lending limits of the Federal Housing Administration. It should be noted, however, that the homeowner does not need to pay any of these closing costs out-of-pocket. All of those fees are typically covered by the mortgage proceeds. If the borrower continues to live in the home for many years, the financed closing costs will amortize over a long period of time and will not impact the remaining equity. On the other hand, if the homeowner intends to sell their house sometime in the near future, the borrowed closing costs will be taken from the sale's proceeds. There are always exceptions, however. Clients with substantial debt may need to choose between borrowing the closing costs and facing bankruptcy or foreclosure. Another option may be a home equity loan or line of credit. However, many seniors cannot qualify for conventional financing because they have inadequate credit or the inability to show repayment capability.
Leaving a legacy
Many seniors may also want to leave their estate to their children or other loved ones and think that by taking out a reverse mortgage, they are eroding that estate. As time goes by, in other words, more and more of their equity will be lost. When the house is sold, whether it is before or after the homeowner's death, that sale's proceeds will pay off the outstanding loan, and the remaining balance, if any, can be passed on to their heirs. In cases where the heirs wish to keep the house in the family, they can pay off the outstanding reverse mortgage loan to retain the house's title.
The distribution decision
Another suitability issue depends on how the homeowner plans to receive the proceeds of the reverse mortgage. A client who applies for a reverse mortgage can access the cash in many ways, including:
1. Equal monthly payments over a lifetime or for a set period of time
2. As a lump sum
3. As a line of credit
4. As a combination of the above
Educate and guide
Many seniors are wary of reverse mortgages. They may have heard stories about borrowers who lost their homes to the bank or the government. It is important to educate your clients on the pros and cons of using this tool.
Barbara Steinberg CFP, CEA, CLTC is a managing member of BLS Advisors LLC. She can be reached at 973-839-5600 or bsteinberg@blsadvisors.com.
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