The two most common uses of a reverse mortgage loan are 1) to eliminate monthly mortgage payments by replacing a conventional mortgage with a reverse mortgage (a requirement of the loan) and 2) to improve cash flow using a reverse mortgage to create a monthly direct deposit into the bank. The borrower is, of course, still responsible for paying property taxes and homeowners insurance and maintaining the property.
I have two clients right now who diligently reviewed their finances and took a serious look at various options to improve their financial situation. Both considered selling their existing homes and “downsizing,” but both also loved their existing homes. Driving their decision process was the need for greater cash flow. One couple had a large first mortgage, while the second couple had both a first and second mortgage (HELOC). After some study, both couples realized that the best solution for meeting their needs was not to sell and move out of the home they loved but to replace their “forward” mortgage(s) with an FHA-insured reverse mortgage. By eliminating their monthly mortgage payment(s), their monthly cash flow has greatly improved.
The second strategy for improving cash flow is for homeowners who owe little or nothing on their property right now and want additional money for monthly expenses, travel or medical expenses (including in-home-care expenses). With a reverse mortgage loan, the homeowner can get an electronic transfer of funds every month that goes directly into the bank account. This can be set up as a tenure plan that continues for as long as they live in the house or as a term plan that has a finite time frame but larger monthly allotments. Some borrowers also may also choose to access their funds as a line of credit to draw on as they need it.
Interestingly, some real estate professionals I work with have referred to me clients they subsequently learned actually preferred to stay in their homes, if only they could make it work financially. Often to their amazement, I am able to show them how a reverse mortgage could provide them with the viable alternative they’re looking for — the ability to remain in their home while enjoying greater cash flow.
Often the first step in this educational process is to obtain a proposal for a reverse mortgage and see what the numbers might look like. I also encourage clients to talk to a financial adviser and other people they trust for financial advice. As another important consumer protection, I inform them that before I can formally submit their reverse mortgage application, they must participate in a HUD-approved counseling session that covers all aspects of a reverse mortgage, including its advantages and disadvantages.
This is why I do the work that I do, to really help. I truly love showing seniors they may have more financial alternatives and resources than they think for improving their financial picture.
John Ruybalid is a reverse-mortgage professional with American Advisors Group. His office is located in Santa Fe.