More than 1 million senior homeowners have now taken out reverse mortgages. There’s a good chance you might, too, once you reach age 62. But the question of how to use the money from the loan is just as important as the question of whether or not to get the loan in the first place.
A laundry list of celebrity spokespeople have tried to explain how these “backwards” loans work. Here’s how the most recent one – gravelly voiced actor Tom Selleck – explains it in a commercial for a reverse lender: “A reverse mortgage loan is a simple idea really – you turn your home’s equity into cash and you pay it back when you leave the house.”
Reverse mortgages are making a comeback from their hottest years in 2007, ‘08 and ‘09, when more than 100,000 loans were made every year. According to the National Reverse Mortgage Lenders Association (NRMLA), 45,000 of these home equity conversion mortgages have been recorded so far in fiscal 2017, most of them through the Federal Housing Administration.
That tips the total to over 1 million since the first ones were originated back in 1990. There’s a good bit of equity to tap, too: NRMLA puts total equity for homeowners 62 and older at $6.3 trillion as of the first quarter of this year.
How much can you get with this type of loan? It depends on a number of factors, but it could be as much as 50 percent of the built-up equity in your home.
What to do with the money? You could always take it to Vegas and bet it all on red. But there are a lot of better ways to use the proceeds. NRMLA recently devoted an issue of its magazine, Reverse Mortgage, to the topic. They advertised 25 ways to use your home equity, with a few extra ideas thrown in for good measure.
NRMLA members were asked by the magazine how their clients put their money to use. Many of the answers are pretty obvious: Pay down debt, replace a salary, pay off a first mortgage, send a grandchild to college. But others are pretty clever.
One of the biggest fears about reverses is that they are just another way for the bank to repossess your house. Or as Selleck puts it, “Like you, I thought that reverse mortgages had to have some kind of catch – just a way for banks to get your house. Right?”
They’re not, as the commercial assures. But in fact, foreclosures are possible with reverse mortgages if the owner-borrower doesn’t maintain the property or pay the taxes and insurance. So one use for the money is to create a set-aside fund to pay the taxes and insurance.
“One of the heaviest burdens for older homeowners is paying property taxes and insurance,” notes Jon Maiolatesi, a loan officer with 1st Financial Reverse Mortgages in Michigan. He describes an older couple living on Social Security: “The monthly budget was tight, but they made it work from month to month. However, twice a year when the property tax and insurance bills arrived, there was often not enough in the checking account to cover them.”
When the couple pursued a reverse mortgage, they found they could arrange for a Life Expectancy Set-Aside (LESA) to pay the taxes and insurance. Funding the LESA does reduce the balance of funds available to you immediately, but it also prevents foreclosure.
Here’s another smart idea: People who take out reverse mortgages generally want to stay in the house a long time, since they have to repay the loan once they move out (or once the home is no longer their principal residence). So why not use the proceeds to redesign your living space to make it responsive to your needs as you age?
Pete Mendenhall, a sales director at Liberty Home Equity Solutions in Coppell, Texas, tells of a widow whose home needed a lot of repairs, even before it could be retrofitted for things like grab-bars and wider doorways.
“Universal design updates allowed [the client] to live more comfortably, with increased wheelchair mobility, and to age in place with dignity. Universal design and other types of upgrades would also help with resale value when the time comes.”
Proceeds can also be used to build living space for an aging parent or a caretaker. You can even use the money to buy a new home.
Dennis Loxton, a sales manager with Liberty in Fort Wayne, Indiana, says one of his borrowers used her equity to do what’s called a “HECM for Purchase.” The borrower used a Home Equity Conversion Mortgage (HECM) on the new home to provide 50 percent of its purchase price . The balance was paid in cash from the proceeds of the sale of her existing house plus other assets, so there were “no monthly repayments thereafter,” said Loxton.
Lew Sichelman has been covering real estate for more than 30 years. Readers can contact him at firstname.lastname@example.org. Freelance writer Mark Fogarty contributed to this report.