Reverse Mortgages were created in 1961 to allow qualified homeowners to convert their home equity into cash without selling their home or taking out a home equity loan. Historically, reverse mortgages have allowed people to generate funds to cover a wide variety of living expenses without tapping retirement or savings accounts.
In the few short months since the arrival of the COVID-19 pandemic, many people have had their income reduced or halted, watched the value of their retirement plans deteriorate and are being advised to build up, not tap their savings account. According to Fidelity, the average 401(k) and IRA was down 19% and 14%, respectively, by the end of the first quarter of 2020. The recently enacted CARES Act allows some people affected by the COVID-19 crisis to borrow up to $100,000 from their 401(k) plans and to withdraw money they have contributed without paying a tax penalty. However, these funds will have to be repaid and income taxes will still be owed on withdrawn money.
Given these circumstances, qualified individuals who have a significant amount of equity in their homes may find Reverse Mortgages as a viable source of funds.
Rebecca Diaz, Branch Vice President of Legacy Bank explains who qualifies for a Reverse Mortgage. “To qualify, an individual must be at least 62 years of age. They must either own a house, condo or townhouse free and clear or have at least 50 percent equity in their home. The equity is based on current market value, not what the owner paid for the property. Depending on the lender’s loan policy, a manufactured home built on or after June 15, 1976, may also qualify. You can also utilize a reverse mortgage for the purchase of a new property, as long as you are a qualified Reverse Mortgage borrower and a sufficient amount of cash is available for the down payment.”
The lender providing the reverse mortgage lends the home owner an amount equal to their equity. These funds can be received by the borrower as a single lump sum, a fixed monthly payment for a certain period of time, a lesser fixed monthly payment for the life of the loan, or a line of credit. There can also be a combination of different advance structures. Speak with your lender to find the best fit for you. These funds aren’t taxable as the IRS considers the money to be a loan advance. Interest accrues on the funds advanced. That interest is rolled into the outstanding loan balance which means that there is no monthly payment due from the homeowner.
“There are fees involved,” notes Diaz, “including a lump sum for mortgage insurance, loan origination and servicing fees like appraisal, title search and insurance, inspections, recording fees, etc. Most lenders will allow borrowers to finance these costs into the loan when sufficient equity is available.”
A homeowner with a reverse mortgage is required to pay property taxes, maintenance and property insurance. Standard Reverse Mortgage loans do not utilize an escrow account. A Reverse Mortgage cannot be in a second lien position. If there is an existing traditional mortgage and/or a Home Equity Loan already in place, those loans must be paid off with cash or with proceeds from the Reverse Mortgage. At least one of the borrowers must live in the home for a minimum of six months of every year in order for the home to be considered their primary residence. Eventually, when the homeowner moves or dies, the home is sold. The proceeds go to the lender to repay the Reverse Mortgage’s principal, interest, mortgage insurance, and fees. Any additional funds from the sale go to the home owner, if still living, or to their estate. In some cases, heirs may choose to pay off the mortgage and keep the home.
If the home is owned by a married couple and both hold title to it, both can be classified as borrowers. Should one spouse die, the other can continue to have access to the Reverse Mortgage proceeds and live in the house. If only one spouse has the title to the home, both must consent to the loan though the other spouse will not be an actual borrower. If the surviving spouse wants to keep the home, he or she will have to repay the loan through other means.
“There are several types of Reverse Mortgages structures and a lender can review them with an interested home owner. While they were never conceived as a financial tool for a pandemic, they may be a viable option for many people today,” Diaz concludes.
Rebecca Diaz is the Vice President and leader of Regency Business Development for Legacy Bank. Mrs. Diaz was top of her class at the Graduate School of Banking at Colorado and has been recognized as the Latino Chamber’s 40 Under 40 award recipient. An avid Pueblo County volunteer, she has spent 12-years primarily in community banking advocating for local businesses and residents.
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