In a Nutshell: A reverse mortgage is a mortgage designed for homeowners aged 62 and up to leverage their equity now. Reverse Mortgage Funding LLC educates clients on the process and helps qualified borrowers to access their home equity. Borrowers may pay off an existing lien and use the remaining proceeds for things like home renovations, paying off debt or purchasing a second home.
Many older homeowners decide to renovate their homes so they can live in them well into retirement. But with limited cash flow to pay for a mortgage, bills, and other expenses, they may lack the money for home improvement projects.
Some of those homeowners consider downsizing. But with home prices skyrocketing, buying a much smaller property with a large price tag doesn’t make much sense either.
Those homeowners face a dilemma. They could take out a home improvement loan, but if their debt-to-income ratio is too high, they may get a higher APR and monthly payments they can’t afford.
That’s why many homeowners decide to take out a reverse mortgage that allows them to turn their home equity into cash.
According to the Federal Trade Commission (FTC), reverse mortgages take part of the equity in a home and convert it into payments — like an advance on a home’s value. The money people receive is usually tax-free, and most people don’t have to pay back the money for as long as they live in their home. Then, when someone dies, sells the home, or moves out, they — or their estate — repay the loan.
David Peskin, President of Reverse Mortgage Funding LLC (RMF), wants to educate people on reverse mortgages to highlight their many benefits. He said this type of loan can be a valuable alternative for older adults with limited income streams.
“When I talk to people about what I do, their first perception is, ‘That’s the loan where a bank takes your home.’ But after I explain it, they often say, ‘Why wouldn’t I do that?'” David said.
Highlighting the Benefits of Reverse Mortgages
Some homeowners have a negative perception of reverse mortgages because of their history. When the Federal Housing Association (FHA) introduced reverse mortgages, they catered to individuals who had no credit or income and were in foreclosure.
Still, the FHA required companies to offer the loan.
“They were essentially telling providers that you still have to approve the loan even if the person wasn’t paying taxes, insurance, or mortgage on time. Loans like that are going to go into default. So, it became known as the loan of last resort, even though it was a great product and made sense,” David said.
FHA introduced the FHA stabilization act in 2013, and this changed how reverse mortgages are underwritten. FHA implemented credit, income, and asset tests. Now, only those homeowners who can pay taxes and insurance to prevent foreclosure now qualify for reverse mortgages.
Still, David notes that some people still don’t understand the benefits of reverse mortgages. When he and his team connect with homeowners about products, he often hears the perception that a reverse mortgage is “a way for the bank to take their home.”
He says this is entirely untrue, stemming from the fact that reverse mortgages were often given to homeowners who lacked the funds to pay their taxes and insurance. RMF is working to change that perception.
“We’re getting materials out there and doing webinars with financial advisors, so they can get to know the product. We want to wipe away those misperceptions,” David said.
Giving Homeowners More Financial Flexibility
Older homeowners can make whatever payment they want on their monthly mortgage principal and interest — from $1 to the entire amount with a reverse mortgage.
“They have the flexibility to make any payment, so you’re improving someone’s cash flow potential,” David told us.
Homeowners may consider a reverse mortgage for a variety of reasons.
For instance, someone may want to pay off student loans for their children or grandchildren. Those student loans may have a higher interest rate than the individual’s mortgage, so using the money they would spend paying down the principal and mortgage for the student loan could make financial sense.
Other homeowners may want to improve their homes, so they are safe for aging in place. Using their income stream that way rather than for buying a new home can help them build equity — particularly in areas where property values are increasing.
Others use the reverse mortgage loan to secure in-home healthcare or purchase vacation properties.
Reverse mortgages can also boost the credit scores of homeowners. They can use the money to pay off high-interest credit cards or medical expenses that may have damaged their score over the years.
If their mortgage rate is low, responsible homeowners can use the reverse mortgage loan to pay off other bills, make property improvements, or expand their financial portfolio.
“Why are so many people in a hurry to pay off their principal and mortgage? Many people think, ‘I’ve got all this cash sitting in my home, and I’m forced to keep building equity in my home even though my income is diminished,'” David said.
A New Outlook on an Innovative Mortgage Strategy
When David explains the benefits of a reverse mortgage to potential borrowers, he tells them that they are taking advantage of the equity in their home, essentially shifting an asset.
“You can sell your home, downsize, or rent with an appreciating asset. You’re reinvesting in your home in this way,” he said.
For instance, a homeowner might decide to take out a reverse mortgage rather than sell their home. That individual still owns the home, has a low monthly payment, and could eventually sell the original property for a higher price in a competitive market.
Many of David’s clients are older adults — age 62 and up — who appreciate the flexibility a reverse mortgage offers. They can control their mortgage payments whenever they like, especially when they receive a large healthcare bill. Others decide to use the loan to secure long-term care insurance.
RMF recently lowered the minimum qualifying age to 55 on its proprietary reverse mortgage product, Equity Elite®. Now, older members of Generation X can tap into their home equity as part of their retirement planning strategy.
David said he hopes that more homeowners see the potential in reverse mortgages. The loan itself is not the problem that some people think it is; instead, its reputation mostly came from the original borrowers.
“If you’re not able to pay your taxes and insurance, your home will go into foreclosure. There isn’t a lender in the world who can stop that,” he said.
Instead, a reverse mortgage can do the opposite.Homeowners who are struggling to pay those fees because their income flow has slowed can keep from losing their home through a reverse mortgage. Those funds allow them to pay the fees, rather than the principal or interest.
“You have payment flexibility. We can improve your cash flow if you don’t have to pay off the principal and interest,” David told us.