May 4, 2021
Home Equity Rises. Reverse Mortgages Don’t
The housing market has shrugged off the pandemic, and home prices are rising sharply due to historically low interest rates. The market crash more than a decade ago is a distant memory.
The total value of the equity in older Americans’ homes has doubled since 2010, hitting $8.05 trillion at the end of last year. The irony is that federally insured reverse mortgages, which allow a long-time homeowner to cash in on tens of thousands of dollars of equity, aren’t very popular.
Last year, only 42,000 Home Equity Conversion Mortgages (HECMs) were sold – half as many as in 2010 – according to the U.S. Department of Housing and Urban Development (HUD).
One reason HECM reverse mortgages haven’t caught on, as the Consumer Financial Protection Bureau notes, is that they might not be suitable to homeowners who eventually sell their house. As the loans accrue interest, the “balance is likely to grow faster than their home values will appreciate,” the agency said.
But most retired homeowners never move, and HECMs are one option for people who are short on income. “We accept it as ‘normal’ to spend-down 401(k) funds, yet somehow home equity is sacrosanct,” said Dave Gardner, a former mortgage broker who sometimes handled reverse mortgages. Retirees, he said, should consider this question: “Could you achieve a better result and extend the lifespan of your nest egg with a reverse mortgage?”
To qualify for the loans, borrowers must be at least 62. They can take the reverse mortgage proceeds in the form of a lump sum, line of credit, or monthly payments – or some combination of these.
Curious homeowners can check out the federal government’s new pamphlet, which explains the basics of reverse mortgages. It’s aimed at people who already have the loans but is just as useful for people who are curious about using one themselves.
Before proceeding with any complex financial transaction, however, it’s critical to do due diligence. A reverse mortgage is no different. One protection the federal government has built into HECMs is a requirement that prospective borrowers consult a HUD-approved financial counselor.
Ask the counselor and lender enough questions to have a clear understanding of how the loans work and what the risks are. It’s also important to look for a reputable lender – just as you did for your traditional mortgage.
The amount of equity that can be borrowed is determined by a government formula. HECMs, which are more expensive than traditional mortgages, carry a few different fees: an origination fee for the lender, which is capped at $6,000; upfront and monthly insurance premiums; and the same appraisal and closing costs required for regular mortgages.
But home equity is one of the largest assets retirees own. If you’re struggling to cover your retirement expenses, a reverse mortgage is something to consider.
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