By Jose Herrera
Signal Staff Writer
Life is full of experiences – work, finding love, paying taxes, staying healthy, raising a family and more. Once a person reaches a certain age, it is time to relax and enjoy life and loved ones as much as possible.
However, how does someone over the age of 60 fully experience their life once when they might be retired or perhaps don’t have the support of family to ensure their remaining years are worry-free?
Financial advisors have an option: a reverse mortgage.
What is a reverse mortgage?
The Federal Housing Administration-insured Home Equity Conversion Mortgage, also known as a reverse mortgage, was signed into law by former President Ronald Reagan in 1988.
It’s a mortgage designed for senior homeowners, generally ages 62 and older, according to Steve Schaefer, a reverse mortgage advisor who works for American Family Funding.
“It’s a way for them (seniors) to access the equity in their home, pay off any existing mortgages that they may have to eliminate monthly mortgage payments, and supplement their retirement,” Schaefer said.
In addition, when an individual takes on a reverse mortgage, they do not have to make a monthly mortgage payment – unless they want to, he added. A homeowner will still have to pay property taxes, pay homeowners insurance, and if they live in a homeowner’s association, they would have to pay HOA dues, too.
“You have to maintain the property, which is what any responsible homeowner would be doing,” Schaffer said. “The big key is you don’t have to make that monthly mortgage payment, and instead the payments accrue what would have been paid and you end up paying the full mortgage payment when it is due and payable when you leave the home, permanently.”
So, if a person lived in their home for 10 or 15 years, then decided to move or leave behind their home, the reverse mortgage becomes due and payable at that point, he clarified.
Schaefer, a senior himself, has approximately 10 years of experience advising his clients on the topic of reverse mortgages. Before then, he spent 20 years helping people through nonprofits such as United Way, the Music Center and the American Red Cross.
“There was a need for someone to work with seniors,” Schaefer said. “I’m well aware of the issues and problems that people may face during retirement.”
Who should consider a reverse mortgage
Jerry Citarella, a financial advisor with Prosperitas Financial, helps clients through the reverse mortgage process. He has an extensive background in assisting people with their finances.
“I look at the true need for my clients, and try to find out what other options may be available, if any, to provide them with an income or a lump sum of cash,” Citarella said. “We have to look at the whole situation and have a conversation about what their priorities are.”
A lot of people are against reverse mortgages because they don’t want to take the equity out of their homes, according to Citarella.
“But in reality, if they’re going to leave the house behind to their kids, they should take a reverse mortgage because they don’t have to make payments on it,” Citarella said. “It’s just a math problem. If you need the money and you have money in your house, (a reverse mortgage) is one of the most efficient ways to get money out.”
Benefits and consequences of a reverse mortgage
Schaefer and Citarella agree the benefits of a reverse mortgage can improve the quality of life for individuals.
For example, if someone decides to obtain a reverse mortgage for $300,000 and their home is worth $600,000, they don’t have to make payments each month.
Those payments are being delayed or just being added so the total interest accrues on top of it, Schaefer explained.
“That’s the key, it’s giving you flexibility,” Schaefer said. “Most people don’t make the monthly mortgage payment so their balance grows over time. When they leave their home, they sell their home and from the sale pay off the existing balance on the reverse mortgage without any other excess funds.”
Both advisors said a homeowner needs at least 50% of the equity in their home before considering a reverse mortgage – anything less might risk the chance of paying off the reverse mortgage when the time comes.
“The point being is that the loan compounds over time. There has to be enough equity in the home to account for that,” Schaefer said. “In other words, you’re using the other 50% of the equity to account for the interest that has been added to it over the years. If you keep it long enough, there’ll still be enough equity in the home to pay off the reverse mortgage.”
A reverse mortgage could provide a monthly supplement apart from Social Security benefits or additional financial assets such as stock or other investments, according to Schaefer.
“I think a lot of people just have negative feelings about the (reverse mortgage),” Citarella said. “I think it does make sense for more people than the number of people that end up doing it. And after a detailed analysis, I would say to anybody, ‘Don’t be afraid of it.’ You should Look at it and see if the math makes sense. Talk about it with people that you can trust.”
