Last week the Consumer Financial Protection Bureau (CFPB) issued a detailed a report on the growing market for reverse mortgages.
"For most Americans, their home is the single largest asset they own," the report explains. "In 2009, half of homeowners age 62 and older had at least 55 percent of their net worth tied up in home equity. Home equity is accumulated over a lifetime of mortgage payments and house-price appreciation, but generally cannot be accessed without selling the home or taking out a loan. Reverse mortgages enable older homeowners to use that home equity to enjoy a more comfortable retirement without selling their home."
However, according to the CFPB, reverse mortgages are not always being used as Congress intended.
While the purpose of reverse mortgage is to provide income for borrowers during retirement, the agency is finding more and more people are getting reverse mortgages at younger ages, which increases the risk they will go broke later in life. Plus, 70% of reverse mortgage borrowers are opting for lump-sum payments which can be squandered quickly and increases the likelihood of foreclosure down the road if there is no money left to pay property taxes.
"Today, the market for reverse mortgages is very small," the report adds. "Only about 2 percent to 3 percent of eligible homeowners currently have a reverse mortgage, and only about 70,000 new reverse mortgages are originated each year. But reverse mortgages have the potential to become a much more prominent part of the financial landscape in the coming decades. In 2008, the first baby boomers became eligible for reverse mortgages. The baby boom generation (48- to 66-year-olds in 2012) includes more than 43 million households, of which about 32 million are homeowners. As of 2009, the median home equity for baby boomer households was $108,000."
For seniors who are "house-rich" but "cash-poor," reverse mortgage can be a great financial product in their retirement plan, according to Dru Bocek who has been a dedicated reverse mortgage consultant since 2006.
"Now, we have more reverse options to consider," she said. "When I first started there was just A or B, and we used A most of the time. But everybody's different. It's not one size fits all. You may need to borrow the most money that's available to you in order to pay down other debt, or you may simply want the peace of mind that comes from having money available to enjoy a more comfortable life. You can even purchase a home using reverse mortgage. There are certain situations where it makes total sense."
When it comes to weighing the pros and cons of different options based on your unique situation, Bocek, who recently joined the team of seasoned reverse mortgage specialists at Security One Lending, emphasized the importance of understanding all the facts when it comes to making a reverse mortgage choice.
"Most importantly, you want to make sure you're making the best choice for your situation," she explained. "Whether you want to stay in your home for just a few more years or the foreseeable future, it's important to find the best deal overall. Some reverse mortgage options provide maximum borrowing capacity, while others offer lower up-front costs. Either way, the older you are the more money you get, so I even suggest to some clients that it might better to wait."
Along with the expertise of a reputable lender, anyone considering a federally-insured reverse mortgage must complete housing counseling through the US Department of Housing and Urban Development (HUD) so they understand how a reverse mortgage works and know all their options before making any decisions.
"It's my job to provide you with the facts," Bocek added. "I don't push anyone toward any decision. We don't even take an application until you complete the required HUD counseling which reviews other alternatives you may want to consider as well as suggestions for lowering monthly expenses. Then, if you decide to go with a reverse mortgage, they will review the different products and payout options with you."
To be eligible for a reverse mortgage, you must own and reside in your home and be a senior 62 years of age or older. Most reverse mortgages today are insured by the Federal Housing Administration (FHA) as part of its Home Equity Conversion Mortgage (HECM) program which offers several options. To learn more, contact the CFPB, HUD or an experienced lender.
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