The popular fixed rate product, which has accounted for up to 72% of reverse mortgages arranged in the last 5 years is looking likely to be suspended shortly. This will be replaced by the adjustable rate Saver product.
This is good news as the Saver product is a lot more flexible. It allows for people to take a smaller amount whilst keeping a line of credit.
As explained in earlier posts, a reverse mortgage can take the form of a lump sum. You agree the amount with the provider and then that is the amount that you receive when the mortgage completes.
So who is the type of reverse mortgage suited for and what are the pros and cons?
If you are particularly good at managing your money, then why change the habit of a lifetime? Instead, receive a lump sum and put your money to work like only you can. Investments, savings and speculation, if done right, can make a reverse mortgage very appealing.
Also, many people require a lump sum from their reverse mortgage because they are looking to make a big expenditure with the money. Perhaps you need a new car, planning on buying a holiday home or a summer house. What about that RV you have been looking at for years. Either way, you will probably need the money there and then, rather than in a line of credit form.
If you aren’t so good at managing your money or don’t have any other reason for wanting the money upfront, then perhaps a line of credit would be the best option.
You may have heard of a line of credit reverse mortgage and have been wondering since what the full story is.
A line of credit reverse mortgage is pretty much as it sounds – the provider assesses your eligibility for a reverse mortgage and decides exactly how much you are allowed to borrow. From then on, although you have been approved for that amount, you do not have to take it as a lump sum. Instead, you can drawdown from this approved amount, as and when you need it.
Of course the benefit of this is that you don’t have to pay interest on the money that you haven’t drawn. If you are looking for a reverse mortgage as a safety net – knowing you have access to cash as and when you need it – then this particular type of reverse mortgage is very useful.
Obviously if you are looking to buy a second home or a major purchase like an RV, the line of credit may not be for you and you’d be happier with a lump sum.
In my line of work, I am often asked the question “How do I know who is the best reverse mortgage lenders?” Now this question may seem like it elicits an obvious response but as with all financial products, there is never an obvious answer. The best reverse mortgage lender will vary widely according to your personal circumstances. What is right for you may not be right for someone else.
It may be that a HUD endorsed HECM Reverse Mortgage may be right for you. Typically, these tend to involve a longer and more complicated process to take one out but when you get there you have the security of knowing it is Government backed. These may seem best to some people but others may prefer the simplicity of a non-HUD endorsed reverse mortgage from a private commercial lender.
These simple examples stress the need for you to get solid, independent advice from a trusted source who can take into account your desires and circumstances.
In an ideal world, the retirement finance that you have been contributing to for years would have gained in size exponentially over the years. The politicians have instilled us with a sense of over-confidence in the economy, which in reality, has gone to plan until recent years. The sad reality today is one where pensioners have little left of their savings, through no fault of their own. The markets have crashed due to the overzealous selling and buying of credit and the responsibility, I’m ashamed to say, falls heavily on the shoulders of the young. It is the more senior members of society who are made to pay. Annuities from pensions are paying very little and interest rates are so low that savings can be difficult to keep in line with inflation.
Reverse mortgages have now been thrust into the limelight and must play an important role in the financing retirement for the masses. House prices have certainly taken a setback in terms of pricing, but nothing like the stock markets and many experts feel that prices are rising and for those who own their homes, typically seniors do, it can make great financial sense to tap into the many years worth of equity stake you have built in your home – especially since there are very few other options.
There are many reasons for wanting to take out a reverse mortgage, all of which have their justifications. One of the main reasons propelling the growth in the industry is home improvements. At a time when income can be fixed and low, a reverse mortgage can help pay for unexpected expenses that simply cannot be accounted for by your budget. As many struggle with matching their outgoings, the need for a new heating system, modifications to the accessibility of the house, or redecorating dated rooms can be too much. A reverse mortgage allows you to tap into the equity in your home to help pay for these improvements – making your life that much more comfortable.
Unlike regular mortgages, a reverse mortgage has a very specific demographic that it is targeting. In most cases, the person taking out the reverse mortgage has to be over the age of 62. This narrows down the potential participants by quite a way. Further to this, it is suggested that you have a good reason for wanting to take out a reverse mortgage. In these bad financial times, there are a plethora of reasons why someone might want extra money to fund their retirement years. The stock market crash has affected many pension funds and gilt rates, along with interest rates on savings. It is for these reasons that a lot of people are turning their attention to the reverse mortgage industry.
If you have ever been across the pond to the UK, you might have heard of the latest industry popping up known as equity release.What is equity release and what relevance does it have to reverse mortgages?
Well for those not in the know, a reverse mortgage is exactly the same concept as a lifetime mortgage, the mainstay of the equity release market.
The term ‘reverse’ comes from the fact that anyone seeking this kind of mortgage is a property owner already so is not looking to buy. Instead they are seeking to release the tied up equity in their home, effectively going back down the equity ladder. For more information check out equity release TV
One of the most important things to think about when it comes to your reverse mortgage is the calculation of the mortgage rate or the interest that you may have to pay on the amount of money that you borrow. The interest rate you pay will depend on two important factors:
Whether the loan is a federally insured HECM reverse mortgage
Whether the loan is a “private” non-federally insured reverse mortgage
If the former, the interest rate is tied in with the one year US Treasury security rate.
If the latter, the interest rate is usually set by the private lender.
So why choose the latter? Simply because HECM reverse mortgages are capped at 2% of the property value – allowing little leeway for those requiring a large sum of money.
With the interest rates for HECM tied into the government set security rate, one might immediately question why anyone would choose non-HECM at the risk of incurring more costs.
However, private reverse mortgages are just as desired and successful as their government backed predecessors. As with anything government backed, HECM reverse mortgages lack flexibility in their options. Given the initial costs of setting up a reverse mortgage, the government cap at 2% of the property value can make what seemed cheap comparatively expensive; particularly when you factor in the important requirement that a reverse mortgage be the only secured debt on the property.
Take the following example:
Homeowner A with a $200,000 property and $8,000 secured loans looks to take out some equity to fund their grandchild’s college fees.
The HECM maximum would be $4000.
Not enough to clear the secured debts.
Now the same example using non-HECM
Homeowner A takes 20% of their property value ($40,000), rids themselves of the secured loans that can often incur high monthly payments, and is left with $32,000 for their original and worthy purpose – to help fund their grandchild’s college fees.
For those looking to take out a small percentage of their property, or for those with a property of substantial value, HECM is the way forward. For all others, the private options look far more attractive.