Older homeowners are also feeling the affordability squeeze
Most of the government's focus when addressing affordability challenges has been on converting renters into first-time homebuyers.
The 50-year mortgage could lower monthly payments, making qualification for lower-income borrowers a reality. Reducing or eliminating loan-level price adjustments could also benefit those same borrowers.
Solving soaring credit costs could help all homebuyers by reducing fees. All of these can make homeownership a little more affordable.
However, another sector of the population is also struggling with affordability. Elderly homeowners, many of whom are on fixed incomes, are also seeing soaring costs, making it difficult for them to stay in their homes. One mortgage originator said there is a tool that many overlook that can help these homeowners.
Renee Coleman (pictured top), mortgage loan officer at CrossCountry Mortgage, is a certified reverse mortgage professional (CRMP). She said reverse mortgages are a critical tool for helping older homeowners combat rising taxes and day-to-day expenses.
“The biggest thing we hear is property taxes keep going up,” Coleman told Mortgage Professional America. “Because the values of our houses are going up, the taxes keep going up. It's harder for seniors to stay in their homes. That's one factor. The other factor is just expenses in general.
“Groceries keep going up. Medical expenses keep going up. And the more you age, the more medical care you need. Also, people are living longer, and so they're having some cash flow issues. That’s why a reverse mortgage is a great way to tap into the equity and help fund those shortages.”
Fixing cash flow problems
The recent drop in mortgage rates also helps out in the reverse mortgage space. According to Coleman, three factors determine how much someone can borrow when taking out a reverse mortgage.
“When the rates come down, it allows the borrower to borrow more,” Coleman said. “There are three criteria that are used to determine how much equity the lender lets you borrow. It's your age, in that the older you are, the more you can borrow. It's the value of the house, and it's the interest rates. And those three combined allow lenders to calculate how much equity you can borrow.
“When the interest rates go down, you can borrow more. So it's a factor that is built into these loans, which are FHA loans, and so HUD creates those factors that we use. So the better the rates, the more you can borrow.”
Because the payments are deferred with a reverse mortgage, the product can help those on a fixed income balance their monthly budgets. This becomes important when property taxes and everyday expenses continue to rise.
“We see it most often when there's a cash flow issue, and they’re making a mortgage payment, and it's too much,” Coleman said. “For some people, if they didn't have a mortgage to pay, then their cash flow situation is much more positive. So, with a reverse mortgage, you need enough equity in the house to pay off the existing mortgage. From those borrowed funds, you pay off your existing lien.”
While tax and insurance payments are still required, without the monthly principal payment, affordability becomes more manageable.
“You do still have to pay your taxes and your insurance, but no mortgage payments,” she said. “So sometimes that's enough from a cash flow perspective. Then maybe they have to dip less into their retirement portfolio, which, in most cases, is a taxable event. If you draw it down from your 401(k), it’s taxable to you. If you draw down from your reverse mortgage, it's not a taxable event.”
Preparing just in case
What brokers may not know about reverse mortgages is that customers who use them aren’t required to draw all of the money from them right away. Coleman encourages people to get it set up in case they need it in the future.
“We even counsel people, even if they're not in that situation yet, to get the reverse set up,” she said. “Get the line of credit set up, and it just sits there, and it grows until you're ready to use it as an emergency fund, or maybe you use it for health care expenses. It's far less expensive to bring in care than to go into an assisted living facility on a monthly basis. We see a lot of clients using the reverse mortgage to pay for that care.”
Like so many originators, Coleman sees her role as an important advisor to customers facing tough decisions in the late stages of life. Unlike standard mortgages, which feel more transactional, she said, reverse mortgages have a different feel.
“I take my role as a lender more from an education perspective than selling mortgages,” she said. “It's not that kind of a product. I'm out there trying to educate. On the reverse side, I consider it a little bit different. I come at it from an educational perspective. I want people to know what it is. I want people talking about it. I want people to understand it.
“It's a tool in the toolbox. It's not the end-all, be-all. It's a tool to be used under the right circumstances. It's not a fit for everybody, but it is a tool many people have misconceptions about.”
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This article is part of our Monthly Spotlight series, which in January focuses on Affordability. Full coverage can be found here.
