Reverse mortgages can be a financial tool to use during retirement in some situations. Technically, reverse mortgages are called Home Equity Conversion Mortgages or HECM by HUD, and have changed over the years, which has led to misinformation and some skepticism. My guest today is Alan Blood, a mortgage professional in Bountiful Utah, who has extensive experience with reverse mortgages, how today’s products work, and when they might be beneficial.
This article summarizes much of the discussion with Alan Blood. See the audio the complete discussion.
A LITTLE ABOUT ALAN BLOOD
Alan Blood is the owner and Lending Manager at CFG Home Loans. Alan has helped homeowners throughout Utah understand and obtain great mortgage financing. He graduated from the University of Utah College of Law with an emphasis in environmental and real estate law and holds a BA in Economics from Brigham Young University. Alan has been working as a mortgage broker since 1996 and served as the president of the Utah Mortgage Broker’s Association and a national delegate to the National Mortgage Broker’s Association.
PEOPLE GET PARALYZED
Those who are heading toward or are close to retirement might be feeling additional stress because of all the negative news because that is what is getting attention. The reality is that the market isn’t as negative as people think and there is still a lot of opportunity for those who are wanting to make a move or explore different financing options.
As human beings, when the boat begins to rock, we often hold and become paralyzed with fear. At times, inaction can be a good thing, but it can be a major mistake. We can mistakenly say that I shouldn’t do anything until everything is ok. Opportunity can exist, even in the midst of uncertainty and chaos.
Doing nothing can be a good solution, as long as it is part of a plan and not the default. A great solution can be the decision to do nothing but far too often people don’t really look at options or take action because they are paralyzed with fear.
FIXED INCOME (SOCIAL SECURITY) AND REVERSE MORTGAGES
Some people may only have their Social Security and their home, but very few other financial assets. One of the options for a reverse mortgage is to supplement income in a situation where limited fixed income exists. Clearly inflation and the cost of living is increasing faster than most fixed income sources. Those who rely on fixed income from Social Security may be getting squeezed tighter and the budget that worked two years ago isn’t working today.
For someone in retirement and on a fixed income, a reverse option may be a financial tool to consider. You can use a reverse mortgage to create a supplemental income source and make it so that you have non-taxable income each month, depending on your situation. You can also use the reverse mortgage as more of emergency fund, if the water heater breaks or other repairs are needed.
Also, if the mortgage is not yet paid off and you’re in a fixed income situation, refinancing into a reverse mortgage can free up the need to make a monthly mortgage payment.
WHAT IS A REVERSE MORTGAGE?
To begin, all reverse mortgage loans are not HECM (Home Equity Conversion Mortgage) loans, which go through HUD. Some reverse mortgages that are not HECM, could have negative components that are undesirable. Because it is a complex financial instrument, you need to be well informed.
Today, we’re talking about a HUD reverse mortgage. It’s a program where you can use the equity in your home to service debt or create monthly income.
With the mortgages we are most familiar with you get a loan from the bank and then make monthly payments to the bank to service the mortgage. You then use your income or your assets to pay the loan.
With a reverse mortgage, instead of using your income or assets to pay the debt, you’re using the equity in the home. So instead of the loan balance going down over time, the loan balance will increase, because you aren’t making a payment.
You own the house and can choose what to do with your home over time. For most people, a large portion of their assets are tied up as the equity in their home. This creates a tool to facilitate using the home as a retirement tool.
WHAT ABOUT TAXES AND INSURANCE WITH A REVERSE MORTAGE?
With a reverse mortgage, you don’t have to make the monthly payment, but you still have to pay taxes and insurance, just like you would with a home that is free and clear. If your house is paid off, you still have to pay insurance and property tax. If you’re in an HOA, you’ll still have those fees. You just don’t have to service the loan with your cash flow.
You also are required to do reasonable maintenance. Reasonable maintenance is that the house isn’t getting condemned. As long as you keep the house in the condition that it meets the minimum base standard, you’ve met that requirement.
From a cash flow perspective, a reverse mortgage is exactly like owning your home free and clear. A reverse mortgage can give you housing for life without a payment.
WHAT IS THE EXIT STRATEGY ON A REVERSE MORTGAGE?
Like with any other mortgage, when someone passes away, someone will be responsible for the house and will have to pay off the mortgage. The difference with a reverse mortgage is that once all whose names are on the mortgage have passed away or have decided to move out of the home and are not longer living there, the mortgage is due within six months.
This give heirs an opportunity to sell the home. In some cases, an heir could buy the home and refinance it. Once it sells, any equity is dispersed just like any other mortgage.
CAUTION AGAINST A REVERSE MORTGAGE
A reverse mortgage is not a short-term financial tool. It can be fairly expensive to get into and can be more expensive than a typical mortgage loan. Typically, these fees are simply applied to the loan.
You really need to ask yourself, before looking at a reverse mortgage, if the home you’re in fits you during your retirement years. Can you see yourself staying in this home for a prolonged period of time? A reverse mortgage is not meant to be a short-term solution.
A reverse mortgage is not the right tool for everyone. See a mortgage or financial professional for advice about your specific situation.
This article summarizes much of the discussion with Alan Blood. Click the audio for the complete discussion.
If you would like to reach out to Alan Blood (NMLS# 1003895-3146) and CFG Home loans you can reach him at 801-298-5887 or email@example.com.
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