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Reverse Mortgage: Friend or Foe?

Reverse Mortgage: Friend or Foe?
Irisangel | Dreamstime.com

By    |   Friday, 09 February 2018 03:17 PM

If you watched a daytime soap opera or game show in recent years, you probably saw older actors such as Tom Selleck or Henry Winkler speak about the reverse mortgage.

What is the reverse mortgage? The FHA-insured Home Equity Conversion Mortgage, or HECM, was signed into law on Feb. 5, 1988, by President Ronald Reagan as part of the Housing and Community Development Act of 1987. The government program allows homeowners age 62 or older to get equity from their homes. The homeowner doesn’t have to pay the money back as long as they live in that property, but they are still responsible for the property taxes and insurance.

What is the problem? The way the program works is that the senior defers all payments and interest to the back end of the loan. If the homeowner lives too long, an heir may inherit a house that’s worth less than the money owed to the bank. If the heirs want the house, then they would have to pay the bank all the interest that is owed. It is a non-recourse loan, so if the heir does not want the house they aren’t responsible for the loan, but they would not receive the house.

That’s the dilemma of most seniors; some have paid off homes and many have seen their value double or triple in value, but they are on fixed incomes or lower incomes than during their working years. As seniors live longer, they see their pensions lose more and more value because of inflation. In some parts of the country, some seniors are struggling just to pay their property taxes and insurance, not to mention all their traditional household expenses, including medical.

Many in the current workforce are reaching retirement age as the first generation without a pension while only receiving Social Security and whatever they saved in a 401(k). We may see that more seniors than ever will need to use the reverse mortgage despite the potential drawbacks for heirs who inherit the house.

Reza Jahangiri, Chief Executive Officer of American Advisors Group, says that AAG talks to thousands of seniors every month and has learned that they like to have options.

“Options give retirees a sense of control over their money,” Jahangiri says. “That’s one of the reasons AAG is moving in the direction of being product-agnostic. Instead of offering only a single product, the reverse mortgage, we’re offering a variety of home-equity solutions that can help seniors cover the gap between their retirement income and expenses.

“The reality is that 50 percent of seniors experience a reduction in quality of life at retirement. But most seniors are homeowners, with their home being their biggest asset, which is why home equity is an important part of the retirement equation.”

In my book "How to Hire Your House," I teach a strategy to show homeowners how to control their own home equity in a cash-value life insurance policy rather than be trapped in their house for the same reason I just described above.

The correct way to use the reverse mortgage is to plan for it long before you are eligible and have a permanent life insurance policy in place, so when you become of age to qualify for the reverse mortgage, you can take equity from your house and not be responsible for any payments on that money. And for the premium payment, you are paying for your life insurance policy. When you pass away, your heirs can choose to either pay off the reverse mortgage balance or let the bank keep the house, and the heirs receive the insurance death benefit.

If you are currently at an age where you can qualify for a reverse mortgage, then you can get the insurance policy at the same time of your reverse mortgage.

In closing, if the reverse mortgage is used correctly, it can be a life-saver for seniors. However, it can potentially have a negative impact for your heirs if you do not have an exit strategy.

Mario Henry, a former National Football League player, is a financial services professional with 18 years of experience in the industry and author of "How to Hire Your House," an innovative guide on how to create a tax-free pension and sustain sufficient income through retirement. Mario also is a licensed insurance broker and a national motivational speaker. He was a wide receiver with the NFL’s New England Patriots and a scholarship football player at Rutgers University.

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If the reverse mortgage is used correctly, it can be a life-saver for seniors. However, it can potentially have a negative impact for your heirs if you do not have an exit strategy.
reverse, mortgage, friend, foe, seniors
Friday, 09 February 2018 03:17 PM
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