A common criticism of the reverse mortgage product category is that the upfront cost is too prohibitive for many people in need of extra cash in retirement, leading some advisors to refer to them as “last resort loans” when no other options exist more. However, after taking into account all of the associated costs, they can be classified as “Loans from first Resort “compared to other, more popular cash flow creation options. This is according to Harlan Accola, National Reverse Mortgage Director at Fairway Independent Mortgage Corporation, in a column on Nasdaq.com.
“When all costs are factored in, reverse mortgages become first-instance loans,” Accola writes. “The fact is, when compared to a portfolio or if they continue to make payments from a portfolio after age 62, they cost significantly less when used as a source of income.”
Aside from the idea that cost alone “should never be the only problem when deciding whether to invest or buy,” says Accola, the real metric to consider is a value metric. Using this metric, looking at some of the ways a senior can take advantage of a reverse mortgage makes a value proposition clearer, he explains. The culprit in the perception of reverse mortgages as expensive loans is the Mortgage Insurance Premium (MIP), which is paid to the Federal Housing Administration (FHA) at 2% of the home value.
“Mortgage insurance for a forward mortgage encourages the lender to take out loans to a borrower with a lower credit score or low down payment so that they can be insured by the mortgage insurance company in the event of default,” Accola writes. “Reverse MIP is much more powerful than Forward Private Mortgage Insurance (PMI). It insures not only the lender but also the borrower AND the heirs of the borrower. The reverse is a no recourse loan that does not require payments until the borrower turns 150 or permanently leaves the home. This is a fairly generous guarantee and a significant risk to the fund. “
This is where the no recourse feature can be very useful as it can be difficult to predict the value of a home later in the future. If a senior reverse mortgage borrower passed away in a volatile housing year like 2009, as suggested by Accola, the insurance company pays the difference between the amount owed and the reduced home value.
According to Accola, using a reverse mortgage offers added value to a person who is classified as wealthy as a reverse mortgage as a source of cash flow provides a cheaper way to get access to additional cash compared to other options like investing compared to other options like investing.
“It also allows a consultant to fully invest their senior clients in longer-term risk portfolios because the cash reserve is in the reverse mortgage line of credit,” says Accola. “There is no need for a cash reserve on the investment account, which is a heavy burden on the return. This line of credit – unlike a conventional line of credit with lower closing costs – is guaranteed never to be canceled or closed as long as the borrower pays HOI and real estate taxes. “
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