Reverse Outlook

Maybe I’m watching too much late-night television, but it seems like I’ve been seeing a lot of Robert and Lindsay Wagner and James Garner lately. All three, interestingly, are really into sleep. Lindsay has for some time now been hawking Select Comfort’s Sleep Number beds, and Robert Wagner and James Garner tell us that we can all sleep more easily if we take out a reverse mortgage on our house. But let’s put the mattress industry aside for the moment and focus instead on these reverse mortgages.

The idea of a reverse mortgage, to many people, seems ridiculous. In fact, it’s likely to trigger a “you’re nuts” kind of response. According to the National Reverse Mortgage Lenders Association, a reverse mortgage enables homeowners age 62 and older to convert part of the equity in their homes into tax-free income without having to sell the home, give up the title, or take on a new monthly mortgage payment.

With a reverse mortgage, the bank makes payments to you instead of you making monthly payments to the bank. Rather than borrowing money to buy a house, a reverse mortgage allows you to tap into your home’s equity—the paid-off value of the home—to secure a loan in the form of a monthly payment, a lump sum, or a line of credit that allows you some flexibility in how you receive your payment. The money can be used to supplement income and pay for anything from health care expenses to a new car.

A Different Point of View

Federal Housing Administration (FHA) reverse mortgages have been around since 1990 and have been growing in acceptance ever since. (See the table). Recognizing the potential hazards of the concept, U.S. Department of Housing and Urban Development regulators have boosted the requirements for securing a reverse mortgage over the years to ensure that homeowners fully understand what they’re doing. That’s because reverse mortgages are known for being complex and difficult to understand. They can also be expensive. Consumers should be aware of additional interest, origination or closing cost fees, and mortgage insurance premiums that could quickly raise the cost of the loan.

Fortunately, securing a reverse mortgage is a much more rigorous process than even taking out a conventional mortgage. Every homeowner who applies for an FHA-insured reverse mortgage is required by federal regulations to meet with an approved independent financial counselor, who explains how the loan works. Homeowners are encouraged to bring family members and trusted advisors to the meeting; indeed, the mortgage professional who represents the company that is offering the loan isn’t allowed to attend the meeting. Upon completion of the counseling session, the applicant receives a certificate required for application.

Retirement Tool?

“This is a mortgage product, but it acts like a financial planning retirement tool,” says Joe O’Kane, general manager of Wealth Enhancement Mortgage Services LLC in Wayzata. That’s because it provides retirement-age people who may not have much in savings with a monthly income. “Unfortunately, the product is misunderstood by both the mortgage industry and the financial planning industry,” O’Kane says.

Reverse mortgages come in all shapes and sizes. The size of the payment to the homeowner is determined by several factors: the age of the owners on title, the value of the home, current interest rates, and FHA lending limits.