Did you retire and need to increase your fixed income? Did you know that as you live in your home and pay the balance of a mortgage, it grows equity over time which can help you convert the equity into cash? A reverse mortgage may be one way to tap into that wealth.
In fact, the average 62-year-old homeowner has $162,000 in home equity, nearly doubling to $300,000 at age 65. Since California is a popular retirement state, many residents may miss out on a critical financial tool known as the reverse mortgage.
According to American Advisors Group, California is the number one state for obtaining reverse mortgages. The equity continues to grow despite the down market, and in 2022, seniors’ Home Equity Exceeds $11.58.
How Does a Reverse Mortgage Work in California?
What are the Requirements for a Reverse Mortgage in California?
Potential Downsides of a Reverse Mortgage
Advantages To A Reverse Mortgage for Older Homeowners
The reverse home mortgage is not a new lending practice. The first reverse mortgage was issued in 1961. It was written into law by President Ronald Reagan to help an elderly widow remain in her home after the death of her husband. In the sixty-plus years following, many federal regulations and limits have been implemented to make a reverse mortgage a safer financial plan for the aging population.
A reverse mortgage loan can work in three different ways, but the most common type is the home equity conversion mortgage (HECM).
1. Home Equity Conversion Mortgage (HECM): Reverse mortgage insured by the Federal Housing Administration (FHA).
2. Property Reverse Mortgage: Proprietary reverse mortgage loans that are not FHA-insured and are offered by a private company.
3. Single-purpose Reverse Mortgage: Single-purpose reverse mortgage loans are offered by state and local governments.
The most popular type of loan, the HECM, allows a homeowner to borrow against a portion of the equity in the property. Having a financial goal in mind will help you decide which type of loan disbursement is right for you.
Disbursement arrangements are commonly available in the following plans:
The key takeaway of a reverse mortgage is that the borrower makes no monthly payment on the loan during their lifetime. Instead, the lender pays the homeowner out of the equity in the home. Of course, there are a few exceptions that will be covered shortly.
The homeowner does remain responsible for the interest on the loan. Still, those payments are subtracted from the remaining equity in the property. Thus, the home’s equity is reduced over a period of time due to the added interest. When the homeowner moves or passes away, the remaining equity balance pays off the loan.
In the past, a negative stigma has been associated with reverse mortgages. The aging population may be more vulnerable due to age-related cognitive impairments or stricter financial budgets. Given those facts, predatory lending practices were acknowledged, and the application process for a reverse mortgage is now heavily regulated.
There are statewide blanket requirements for approving a reverse mortgage, and California-specific regulations are also in place. These additional requirements help protect elderly homeowners from fraudulent promises and manipulation from caregivers or professionals and help provide financial education.
One significant advantage of a HECM is that, unlike other lending practices, your credit score is largely irrelevant. What matters most when seeking a HECM is the available equity tied to your property and how you can use that for a financial payoff.
Obviously, with all of the requirements surrounding a reverse mortgage application process, there must be some drawbacks too. As with many aspects of life, education is critical to understand potential consequences.
These downsides of a HECM revolve around personal circumstances, financial goals, and future plans. Understanding your own goals and objectives will help you weigh the benefits and risks of seeking a reverse mortgage.
One primary consideration is whether an applicant can maintain the responsibilities of the financial agreement. While no monthly payments are due, the homeowner is still obligated to keep up with the property’s functionality, tax payments, and insurance, and they must also reside within the home.
Suppose any of these responsibilities are not upheld by the homeowner. In that case, the loan may become due immediately, or the owner could face foreclosure. Therefore, a reverse mortgage may not be suitable for homeowners who are physically or financially unable to upkeep the property or who plan to move.
Also noteworthy while a HECM does not automatically prevent someone from passing a property down to an heir. It increases the chance that an heir might not be able to afford to pay off the reverse mortgage balance to obtain the home.
Retirement
Retirement age is often referred to as the Golden Years of life. The days of job obligation or child-rearing are now far behind you, and this is the time to enjoy the fruits of your labor. The reality is, though, retirement takes funding.
Need For Financial Obligations
A reverse mortgage can be an attractive financial tool for older homeowners without fully funded retirement accounts. Suppose you’re struggling to meet financial obligations and are on a fixed income. In that case, a HECM can help you liquidate the existing asset of your property.
Not only does a reverse mortgage allow you to access cash, but it also enables a homeowner to remain living in their home. It solves a two-part problem: maintaining living arrangements while allowing the borrower to fund their current lifestyle.
Proceeds Are Not Tax-Free
Another significant advantage of using a reverse mortgage to fund your retirement is that unlike payouts from a 401(k) or other retirement accounts, proceeds from the loan are not taxable. Along with the tax break, you get protection assurance with a HECM. Even if your home ends up being worth less than the existing loan balance, neither you nor your heirs are liable for that difference.
What happens if I sell my home and I have a reverse mortgage?
If you decide to sell your home, you will need to pay back the borrowed money.
What happens to my reverse mortgage if I die?
The loan becomes due and payable. However, your heirs have 30 days to decide if they want to sell the home or turn it into the lender to satisfy the debt.
What are the costs of a reverse mortgage?
What are my obligations with a reverse mortgage?
What types of Homes are Eligible for a Reverse Mortgage?
How are funds distributed with a reverse mortgage?
Can I get out of a reverse mortgage?
Yes, if you find yourself wanting to get out of a reverse mortgage due to your unique situation, you can do the following:
Can I rent my home if I have a reverse mortgage?
The rule to have a reverse mortgage says you must live in the home. However, you need to check with your lender to see if you can rent part of the home and still meet your responsibilities of living there as your primary residence.
How much money can a reverse mortgage give me?
The value of your home will determine the total amount you can get.
Where can I find reverse mortgage counseling in California?
The U.S. Department of Housing and Urban Development (HUD) has a nationwide number of approved counseling agencies that you can search by zip code or state. To find an approved counselor to get you more information on reverse mortgages, check out the website here.
What happens during a reverse mortgage counseling session?
A counselor will help you understand how reverse mortgages work. You will also learn about the financial and tax implications of having a reverse mortgage. Once you complete your counseling, you will have a certificate to submit to your lender to start the loan process.
Your retirement years should be full of freedom and celebration of life created. A reverse mortgage is one tool that can help you achieve that vision. Financial counseling and proper planning may help you determine what type of loan and disbursement plan suits your needs. Making an informed decision can help you be confident about your financial future with a reverse home mortgage.
To find out more about reverse mortgages, contact us at 888-762-7808
