Reverse Mortgages: Friend or Foe?

February 27, 2017

unnamedThe Senator, the Fonz, Mr. Hart, and the Crooner Pat Boone all walk into a ___? Oh sorry, that’s a different article. Let’s back up or as it were, reverse direction.

As many of you remember, right after WWII, living the American Dream hit full stride, with growing families needing more space, and buying a home becoming the new normal. However, with a depression mentality, having debt was not looked upon in a positive way.

Fast forward some 60 to 70 years later, and tens of thousands of seniors are termed “house rich and cash poor.” A state of affairs that means they have a roof over their heads, which frequently no one can take away, but they are strapped for liquid cash to pay for things such as food or medical prescriptions. The local drug store typically is not able to accept a brick from your house to pay for your needed prescription.

Enter the reverse mortgage to the rescue. Now before you just tune out because you think these “are all bad,” let’s remember most anything good today had to go through growing pains. The first cars didn’t have seat belts, much less air bags, and at one point you could even drive with a beer in your hand. The reverse mortgage industry started off with a few bad apples that soured the solution for many. Thankfully the Federal Housing Administration (FHA) took over regulating the process and created a standard that allows many seniors the opportunity to unlock the large piggy bank of equity they have lived in for years, and so desperately need access to, without selling their home.

This seemingly magical mortgage is termed a “reverse” because in one of three ways it allows the built up home equity to be given back to the homeowner.

The three ways you can get funding from a reverse mortgage are: 

  1. A monthly payment for life to meet daily living expenses
  2. A lump sum of cash for immediate needs or emergencies
  3. Establishing an equity line of credit to address future cash needs

Remember that when you receive these funds there is no new monthly expense or payment created unlike with a traditional mortgage. All three options are provided to senior homeowners who must meet just a few requirements, such as being a minimum of 62 years of age, having sufficient home equity, and having enough income to cover the taxes, insurance, and maintenance of the residence.

Of course, you may be asking “Is this too good to be true?” Well, let’s now dispel a few myths related to reverse mortgages and learn a bit more in the process:

  1. Does the bank get the house when Mom and/or Dad dies? In most scenarios, this is absolutely not the case. When the final homeowner passes away or has moved out of the home for more than one year, the balance of the reverse mortgage must be paid off. For almost everyone, this means they sell the house, pay off the mortgage, and keep any remaining equity. However, a very good advantage of the reverse mortgage compared to a traditional mortgage was seen as recently as the 2008 housing crash. We saw home values drop well below the actual amounts owed. If you had an FHA approved reverse mortgage and you had taken a lump sum of $200,000 when your house was valued at $350,000 and the house value dropped to a value of $175,000, you are protected by FHA and you can simply hand the keys to the lender and neither you nor your heirs are liable for that $25,000 difference. Unfortunately, during the same crash, many homeowners found out the hard way that this is not how a traditional mortgage works. What a nice benefit to have in retirement years with a reverse mortgage.
  2. Does my home need to be paid off to qualify? While it is helpful to have no debt on your home, you can have an existing mortgage. To proceed with one of the three payout options available, your existing mortgage must first be paid off with monies from the reverse mortgage. After paying off your existing mortgage, any leftover qualifying equity is made available to the homeowner for a monthly payout, a lump sum, or to create an available line of credit.

Needless to say, this is just scratching the surface of the aspects of a reverse mortgage. It is very important to evaluate this potential financing option in relation to your entire financial picture. Its use could potentially disqualify you for some government assistance programs such as Medicaid or VA Aid and Attendance (though its use will not affect qualifications for your pension, annuity, and Social Security or Medicare benefits.)

It might seem enticing to just pick up the phone and call anyone of our aforementioned celebrity quartet, but I’d first guide you to talk this over thoroughly with a certified senior advisor, aging life care professional, elder law attorney, or reverse mortgage specialist. Do your homework by reading more articles, attending seminars offered here at Iona Senior Services, visiting your local library, or simply coming back here for some new and informative articles.

by Rick Gow, CSA
Certified Senior Advisor & Wealth Management Advisor
with Lara, May & Associates, LLC. Member FINRA/SIPC
General commentary, not a product or strategy recommendation.

Rick Gow is a seasoned Wealth Management Advisor, a member of the Society of Certified Senior Advisors®, facilitator of the Meaningful Future Process™ and nationally recognized speaker on many senior related long term care financial planning topics. He primarily works with seniors, their caregivers and family members, related to all aspects of financial planning for long term care needs. He helps develop all-encompassing long term care plans, tax efficient wealth transfer structures and retirement strategies.  Most plans start with his Long Term Care Financial Assessment that addresses various components: from income generation, Medicaid & Veteran’s Administration compliant insurance products to real estate transfer strategies and principal protection, just to name a few.