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By design, reverse mortgages are destined to make retirement easier and keep people in their homes.
Nelson Haynes, who worked at Deering Savings & Loan in Portland, Maine, is traditionally attributed with creating the primary reverse mortgage back in 1961.
He wanted to help the widowed wife of his high school football coach stay in her household after her husband died.
In that era, “people noticed that there were a lot of windows,” said Martin Neil Baily, a senior fellow in economic studies at Brookings and the prior chairman of the Council of Economic Advisers under President Clinton.
“It was a time when a lot of men had pensions, and when the man deceased, the pension died as well. So these were women that didn’t have anything much to live on, but maybe they were living in a household that was quite valuable,” Baily said.
Reverse mortgages allow homeowners to tap into one of their biggest financial assets (their house) and forgo the monthly payments associated with a typical mortgage. Yet adoption has always remained limited.
In the 1990s, only a few hundred reverse mortgages were initiated on an annual basis. By 2009, there were nearly 115,000 home-equity conversion mortgages (HECMs), as the federally-insured reverse mortgage is called, initiated that year.
That’s when the reverse-mortgage market hit its peak, said Stephanie Moulton, an associate professor at Ohio State University who specifies in housing and consumer finance policies.
“HECM volume has never been huge — never more than 2% of eligible older homeowners,” Moulton said.
Reverse-mortgage proponents say it could serve an important role in retirement planning if it were retooled to fit the needs of additional consumers.
Among the suggestions are products designed to address precise needs in retirement, whether that be paying down other debts or funding the cost of assisted living.
How reverse mortgages operate in the U.S. today
With the more common forward mortgage, a bank loans a borrower a total of money that they must repay in monthly installments over a fixed period of time, such as 30 years.
Nonetheless, with reverse mortgages, there are no monthly payments. Instead, the borrower can draw on the equity in their house like a line of credit.
The loan comes due either when the borrower is deceased or moves out of the home. Often, the house is sold and the proceeds go toward paying off the loan.
In the U.S., reverse mortgages are solely available to people over the age of 62. Homeowners frequently refinance into a reverse mortgage, but eligible seniors may also use a reverse mortgage to fund the purchase of a house.
As with a typical mortgage, someone who opts out for a reverse mortgage must pay origination fees, mortgage insurance, and other closing costs.
The loans still carry interest, though contrasting to your usual forward mortgage the rates on reverse mortgages tend to be variable.
Also, reverse mortgage borrowers must continue to make their periodic property tax and home insurance payments to remain current.
Reference Source: MarketWatch
