500,000 Retirees have taken out a Reverse Mortgage and the Number is Growing
Reverse mortgages are gaining acceptance by financial planners and smart investors alike. With over 500,000 reverse mortgages originated, the safety has improved, and the cost have come down. Reverse mortgages offer benefits to homeowners who understand how they work. Both locally and nationally, laws have been passed to ensure that homeowners are not evicted for non-payment of FHA insured Reverse Mortgages or HECM loans. On the other hand, reverse mortgages have received relatively little attention during the pandemic but mostly because they do not require a mortgage payment.
The simple answer is that reverse mortgages do not require monthly payments and there is no risk of foreclosure for non-payment of the mortgage. However, homeowners with reverse mortgages could have faced the risk of losing their home for nonpayment of property taxes and insurance, in some cases were it not for the foreclosure moratorium.
For example, borrowers may use reverse mortgages as an exit strategy with their existing forward mortgage or to pay off debt more quickly. And private lenders looking to build a reputation as trusted advisors to their clients can take advantage of the opportunity to provide mortgage lending advice. Here are some basics you need to know about reverse mortgages in order to best take advantage these opportunities.
Foreclosures and Reverse mortgages.
Under normal circumstances, a reverse mortgage borrower need not worry about a lender’s foreclosure as no monthly payments are required. The loan balance continues to increase as interest accrues over time. It is only repayable upon the death of the last remaining borrower, the borrower’s relocation, or the death of the non-borrowing spouse if the borrowing spouse predeceased them. The borrower’s only requirement for annual payments is property and insurance taxes, HOA fees, if applicable, and maintenance and utilities.
If the borrower fails to pay them back, technically they are in default and the loan can be called back. This may result in foreclosure. In addition, the house cannot be vacated or abandoned. Just to make a fine point here, the exact same thing will happen if the borrower has a traditional forward mortgage.
Borrowers with a history of not making on-time credit payments and/or income estimates that are too low to pay taxes and property insurance may need an Extended Life Expectancy (LESA). A LESA is similar to an escrow account for future property taxes and insurance; it is based on the borrower’s life expectancy.
These future expenses are deducted from the lump sum payment and the home’s equity and held by the reverse mortgage company. LESA funds become part of the loan balance once the lender disburses them to pay real estate expenses on behalf of the borrower.
Thus, those borrowers who have a LESA, for all intents and purposes, generally should not face foreclosure during their intended life. Many ordinary borrowers who have fallen on hard times during the pandemic have asked their lenders for a grace period. For reverse mortgages, the need for deferment requests is completely eliminated.
Which is better a HELOC or a Reverse Mortgage
By far the largest retirement asset for senior homeowners is their property. These same homeowners may not qualify for a Home Equity Mortgage Line of Credit (HELOC) and may not want to after taking into account the benefits of a reverse mortgage for a HELOC. Unlike reverse mortgages, HELOCs require monthly mortgage payments. Also, the bank may block (or shorten) the HELOC line and not allow access to it.
This puts the homeowner in a precarious position as he is indebted to the property (since HELOC is written into the property to maximize the line’s attraction potential) without any benefit. A bank can freeze or cut HELOC because it’s a quick way to support its balance sheet: the bank doesn’t have to set aside reserves for HELOC until the homeowner draws on it, because it’s just a “potential loan.” Technically, credit only exists when the borrower uses it. If the bank blocks (or cuts) the line, the bank has not yet loaned the money and may terminate it before the borrower has access to the money in his possession.
Most major banks have drastically reduced the issuance of HELOC during the pandemic crisis, and those that continue to offer HELOC have imposed strict lending requirements. Many homeowners simply will not qualify for a HELOC because they don’t earn enough income or their credit scores may be too low. Many borrowers understand that a reverse mortgage has advantages over HELOC in this regard. There are limited income and credit requirements to obtain reverse mortgages. Reverse mortgage lines of credit cannot be frozen or reduced, and since there are no monthly mortgage payments, the risk of foreclosure (even after a moratorium) is minimal.
In-Home Care can be funded with a Reverse Mortgage.
Most people would like to live in their own home rather than a nursing home if they had a choice. Unfortunately, many people cannot afford the 24/7 assistance needed to stay at home and hire helpers.
Once seen as an alternative to home care (often two to three times the cost of nursing homes), nursing homes and nursing homes have received numerous news reports of their residents dying from COVID-19. Loved ones, especially during the virus, are looking for a way to keep their seniors safe at home and get the quality and quantity of care they need. Many people are looking for reverse mortgages to meet this need. Many people have enough money in their homes, especially after the real estate industry has recovered significantly, so that they can take out a reverse mortgage large enough to cover the cost of maintaining their homes and covering in-home care.
The National Reverse Mortgage Lenders Association (NRMLA) reports that there has been a significant increase in withdrawals from reverse mortgage lines by retirees who have lost their part-time jobs and have to make ends meet, who are helping a pandemic-hit family and who usually only worry about their own future finances. The NRMLA reports that the number of draws has increased by 55% and the size of draws has increased by 14%. In fact, they note that some borrowers who have never used their line of credit before are now pulling the line completely.
As a Certified Reverse Mortgage Specialist, The Richard Woodward Team can help you answer all your questions. We have provided the educated advice and low-cost reverse mortgage funding option to so many and we would be happy to help you as well.
Please give us a call at (214) 945-1066 or complete a secure online application here. We will promptly provide you with a detailed customized plan for your needs.
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