Reverse mortgages — technically known as Home Equity Conversion Mortgages or HECMs — seem to be advertised more frequently these days. Lending institutions confirm that there are, indeed, many more requests for information about Reverse Mortgages coming in to their companies.
There are a couple of reasons for this upsurge:
1. The population is aging. As more and more people are reaching retirement ages, the percentage of individuals who are looking for ways to increase their income is expanding. The equity that people have in their homes becomes a form of investment that they can liquidate and use.
2. The generation that is coming into retirement age is less prepared for retirement than were previous generations. Many of these people are carrying more debt into retirement than previous generations.
Gregg Dimkoff, a certified financial planner and professor of finance at Grand Valley State University’s Seidman College of Business, commented that, a generation or two ago, the general assumption in America was when your debts were paid off when you retired. And if they weren’t, you didn’t retire. That is no longer true today.
Dimkoff says that the percentage of all retirees who still have a mortgage is nearing the 50 percent mark. That’s ludicrous from a financial planning standpoint ” Dimkoff says.
The National Reverse Mortgage Lenders Association serves as an educational resource, policy advocate and public affairs center for reverse mortgage lenders and related professionals. According to the NRMLA, a reverse mortgage is a type of loan which is available to homeowners aged 62 or older, which allows them to convert part of the equity in their home into cash.
Reverse Mortgages were created by Congress and the Department of Housing and Urban Development as a means to help retirees with limited income use the equity that they’ve accumulated in their homes to cover basic monthly living expenses and pay for health care. The loan is called a reverse mortgage because instead of making monthly payments to a lending institution, as with a traditional mortgage, the lender makes payments to the borrower.
The borrower does not have to pay back the loan until the home is sold or the borrower leaves the home. As long as the borrower continues to reside in the home, s/he is not required to make any monthly payments toward the loan balance.
However, borrowers must remain current on homeowners insurance, condominium fees, property taxes and the monthly loan interest fees. If they don’t maintain these payments, they, in effect, default on the loan. The lender then has the same legal remedies for recovering the money as the lender has in a standard or “forward” mortgage — foreclosure.
Borrowers should remember that, under FHA rules, the loan comes due if the borrower leaves the house for 12 months or longer. This might happen if the borrower goes into a rehab facility. However, if the borrower spends several months in a rehab facility and then return to the home, it does not impact the reverse mortgage.
There is another aspect to reverse mortgages that are not included in forward mortgages: the HECM “no recourse” clause. This clause ensures that, for the purposes of the loan, the value of the home will never be less than the value of the loan upon closure. For example, if housing values plummet and the sale of the house will not cover the amount of the loan, the lender has no recourse against the borrower’s other assets. The difference is forgiven and is paid through the FHA’s insurance fund which is funded through the insurance premium that all Reverse Mortgage borrowers pay as part of their loan.
Reverse mortgages can seem complicated and some seniors find them difficult to fully understand. The HUD requires that potential borrowers attend a counseling session with a HUD-approved counselor BEFORE they begin the loan process to ensure that the potential borrowers fully understand the benefits and obligations of the loan.