In today’s economic climate, many retirees need creative solutions to meet their income needs. Reverse mortgages, while often overlooked as a planning tool, are increasingly taking on an important role in effective retirement planning. A recent study indicates that the use of reverse mortgages is on the rise among retirement-age clients who need cash quickly; 80,000 Americans took advantage of this option in 2010, up from 25,000 in 1995.
There is no indication that this trend will be reversing itself anytime soon, so now is the time for every advisor to learn the ins and outs of the reverse mortgage.
Reverse Mortgages: How They Work
A reverse mortgage is essentially a loan that your client can take out against home equity. The option—also known as a home equity conversion mortgage (HECM)—is available through the U.S. Department of Housing and Urban Development to homeowners who are at least 62 years old. The client must either own the home outright or must have a mortgage balance that is low enough to be paid off with the reverse mortgage funds.
While interest is charged on the loan, no repayments are due until the client dies or moves out of the home. If the house is sold, the proceeds must be used to pay off the reverse mortgage.
The reverse mortgage has often been an attractive option for older seniors because there are no credit or income requirements. As long as there is equity in the home, the client can qualify. Another perk is that the loan proceeds are not taxable and do not affect clients’ social security payments.
Before finalizing a reverse mortgage, your clients will have to meet with an independent home loan officer who will make sure that they understand the complexities of the transaction.
Why Will Clients Be Interested in Reverse Mortgages?
In the past, reverse mortgages were primarily used by retirees in their 70s who urgently needed cash to pay bills and stay in their homes. The loan was seen as an emergency measure, rather than as part of a strategic retirement income plan.
This perception has evolved—your clients have worked hard to pay down their mortgages and are more likely to see the reverse mortgage as a benefit stemming from this investment. Clients who have seen their retirement savings accounts diminish greatly over the past few years may be relieved to see that the equity value of their homes remains.