Reverse Mortgages provide a viable source of financial independence for many seniors. Earlier this year, two major players in the reverse mortgage market stopped offering them, citing higher costs, lowering real estate values and unwieldy regulations.
With many seniors already apprehensive to consider a reverse mortgage, the exit of two major financial institutions from the market may reinforce the perception that reverse mortgages are a risky endeavor. However, as with any financial product, it is important to understand the parameters and purpose of a reverse mortgage before dismissing it. Seniors should also bear in mind that the recent regulatory developments with reverse mortgages, which prompted these institutions to stop offering them, were actually implemented to safeguard seniors in the lending process.
Reverse mortgages allow homeowners over the age of 62 to receive either a lump sum of money or a regular stream of income by converting a portion of the equity in the property to cash. Borrowers must continue to pay the property taxes on their homes, as well as keep the property insured and maintained. When the homeowner either moves or dies, the property is sold, the bank is paid back from the proceeds of the sale and left over funds go to the homeowner or his/her estate.
A reverse mortgage, as with a traditional mortgage, is a lending instrument and subject to government regulations and qualifications. There are also costs associated with originating the loan.
Reverse mortgages have traditionally been used as a retirement fund for seniors who have limited sources of income beyond social security. With the many unforeseen increases in costs of living coupled with the hit to many people’s retirement accounts with the market performance in recent years, many seniors find reverse mortgages to be the solution that allows them to maintain a comfortable standard of living.
Because a reverse mortgage can impact your existing estate plan and affect your planning options in the future, you should consult with your estate planning attorney and financial advisor if you’re considering a reverse mortgage.