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If you’re old enough, you may remember when Americans were, by and large, pretty responsible about money management.
They scrimped and saved, and stashed money into savings accounts. They squirreled away cash for vacations and home improvements, rather than funding those purchases with credit cards. And their belief was you kept on paying the mortgage on your home until that home was yours free and clear, not the lender’s. Maybe you passed it on to your children in your will, or you sold it late in life. But your home was your shelter and your security blanket, not a greenback dispenser.
Not so for Baby Boomers and subsequent generations following them into old age. “Certainly our children’s generation is going to look at a home more as an investment,” says Atlanta-based credit counselor Sue Hunt.
“If they have accumulated equity in their home as they near retirement, they will look at that equity as part of their retirement plan.” And for many of these people, a reverse mortgage will provide the necessary tool to tap that home equity and use it to fund their retirement years.
What’s a reverse mortgage?
Unlike a traditional forward mortgage, in which you borrow the money upfront and pay it off in a series of payments over the life of the loan, a reverse mortgage works in the opposite way. The borrower receives payments over the loan’s life and the loan is paid off when the house is sold, when the borrower passes away or when he or she moves out of the house. As such, it is likely to be a viable financial tool for many Baby Boomers who haven’t saved enough for retirement, but have managed to pile up some substantial home equity.
A reverse mortgage is ideal for older folks who want access to a little more money to make ends meet on a regular basis, or who want to tap their home euqity to finance a non-recurring outay, such as adapting the home to be more accommodating to the mobility restrictions of increasingly aged residents.
Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association (NRMLA) in Washington, D.C., says reverse mortgages are also used by those with significant resources, to avoid having to sell investments that have fallen in value during market downturns. Instead, these folks use reverse mortgages, withdraw a little needed cash, and return to using their investments to fund their retirements when the value of those investments have returned to something approaching normalcy.
One of the big pluses of reverse mortgages is that would-be reverse mortgage holders must go through counseling sessions with counselors certified by the U.S. Department of Housing and Urban Development. That is to ensure they are educated to the nature of reverse mortgage products and are fully aware of all aspects of the loan before committing to the mortgage.
According to Hunt, director of reverse mortgage counseling at non-profit credit counseling agency CredAbility in Atlanta, the biggest misconception many have about reverse mortgages is that such a mortgage will solve an immediate financial crisis. In fact, she says, counselors have to work with such people to ensure they take a broader view than simply focusing on the immediate need. They need to view the loan within the larger context of their financial lives. For instance, they must keep in mind after landing a reverse mortgage, they will still be responsible for their property taxes and homeowners insurance.
They must, Hunt says, “understand those are ongoing responsibilities.”
Many homeowners start the process of finding a reverse mortgage lender by speaking with a bank, a mortgage company or a mortgage broker, with each likely to offer slightly different options and different rates, Bell says.
Those who want to bone up on homework prior to shopping wold be wise to visit the NRMLA website, www.reversemortgage.org, to obtain a wide selection of educational materials specifically designed for consumers. Once the homeowner has undertaken the counseling session with the HUD-approved counseling organization, the counselor issues a certificate. The lender chosen cannot begin process the reverse mortgage until he has the certificate in hand, nor can he levy any fees or costs on the borrower.
The mortgage meltdown of 2007-09 led to a decline in reverse mortgages. They became less attractive once property values plummeted and the equity in homes declined, Hunt says. But as home values begin to inch upward again, look for a return to use of reverse mortgages by more and more Americans.
After all, as Bell notes, most Baby Boomer-led households have less than $100,000 in savings or investments, despite the rapid approach of their retirement years. The largest part of their net assets lies in the equity in their homes. “That being the case, and longevity growing,” Bell says, “it’s clear to us the equity in the home will have to be an integral part of the equation in funding retirement.”
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