Some Validation for the Reverse Mortgage In the past decade, most financial advisors' eyes rolled at the mere mention of reverse mortgage lenders. These loans provide homeowners with an advance on their home equity and allow them to delay repayment until the home is sold. Advisers used to tell their clients that retirement savers weren't the target audience for such products. Many experts and academics have changed their thoughts regarding reverse mortgages because to new precautions introduced in recent years. And many people are looking at when and how to incorporate them into their budgets. The Reverse Mortgage Stabilization Act of 2013 is a major reform that limits the amount of equity a homeowner can get at once from a reverse mortgage. Specifically, the act forbids access to about 40% of the maximum loan amount until one year after the initial loan is made. In addition, new laws mandate that property owners show they have the funds and commitment to pay their annual tax and insurance premiums. There are also new safeguards in place for the spouse who is not the primary borrower. Recent regulation reforms "should make the product safer for seniors in the future," says Stephanie Moulton, an associate professor at Ohio State University and co-author of a research on reverse mortgages published in the Journal of Urban Economics in 2015. Prof. Moulton claims that the default rate on reverse mortgages might be halved if certain changes were made, such as limiting the amount of equity borrowers can take up front. (In 2014, almost 12% of Home Equity Conversion Mortgage borrowers who received federal insurance were behind on their property taxes or homeowners insurance.) Prof. Moulton predicts that the new regulations "may encourage larger banks to re-enter the market," which would boost the product's legitimacy and bring down prices. In a 2015 paper, Wade Pfau, a professor at the American College of Financial Services in Bryn Mawr, Pa., advocated for the use of reverse mortgages in a retirement-income plan under the right circumstances, but he also noted the risks involved, such as spending the proceeds too quickly and suffering losses if the proceeds are invested. Professor Moulton admits that there are dangers, but points out that the government takes on some of the borrower's risk through the HECM because it is federally insured. She cites the fact that HECM borrowers can never incur a negative equity position as an illustration. With government insurance, you won't have to worry about your reverse mortgage balance going beyond the value of your home. What follows is a breakdown of the financial advisor-recommended approaches to utilising a reverse mortgage. Getting a lump sum payment: According to Professor Moulton, one of the most common applications of a reverse mortgage is to borrow enough of the equity in a house in a lump payment to pay off an existing mortgage. She found that over 60% of people who took out a reverse mortgage used the money for this. It might be a good plan, she says. Almost 40% of seniors age 65 and up carry a mortgage today, according to a recent analysis by Harvard University's Joint Center for Housing Studies, which more than doubles the percentage from 1992. Prof. Moulton mentions this finding. She explains that when a forward mortgage is paid off with a reverse mortgage, the household's monthly cash flow improves. Like getting a monthly annuity payment, it will have a similar impact on a family's finances. But there are risks involved with borrowing a large sum all at once. Chairman of Evensky & Katz/Foldes Financial in Lubbock, Texas, Harold Evensky, cautions against spending a large quantity of money to incur more debt, such as for a down payment on a second or vacation property. While he admits that certain situations could warrant such a course of action, he stresses that it is not something to be taken on without first thoroughly weighing the risks involved. He warns of the dangers of "overleveraging," or taking on more debt than one can comfortably repay. https://standardlenders.com/reverse-mortgage-loan-product/