It’s likely that a piece of your clientele is older. By older, I mean retirees or soon-to-be-retirees.
Keep these two startling statistics in mind as you provide excellent services to and for your older clients…
– 42% of people 55-64 years have NO retirement savings, according to GOBankingRates
- 65% of the people who do have retirement savings hold those savings in cash, not in investment vehicles that can grow it, according to research by BlackRock.
Therefore, many of your older clientele may ask your advice about reverse mortgages as a way to generate cash by drawing on equity they’ve built up in their homes.
Reverse mortgages are complicated loan instruments because the home owner(s) borrow money based upon their home equity. The borrowers are NOT required to make loan payments BUT ARE REQUIRED to pay TAXES and INSURANCE on the home. The loan balance GROWS as the borrower(s) continue to use the home as a primary residence. Once the owner(s) move or die, the LOAN MUST BE PAID OFF IN FULL.
There is a 2% of the home value upfront cost for mortgage insurance origination and lender fees. These fees average $7,500 upfront.
Both the Consumer Financial Protection Bureau and AARP recommend other options to reverse mortgages…both see reverse mortgages as the last resort to access cash.
Other Options
Home Equity Loans – installment loans secured against the equity in the house (the value of house less the amount owed on the house.) The borrower gets cash payments from the bank and the borrower makes monthly payments to pay o off the principal of the loan plus interest.
Home equity loans can be risky if the borrower defaults…borrower could lose their home…but if the borrower wants to buy something major without having to pay a higher marginal tax bracket (say, by taking the money out of a 401K or IRA account) then this is a good option.
HELOC or Home Equity Line of Credit – like a credit card backed by your home. Bank sets up the amount of credit line based upon the value of the home. There’s usually a draw period of 10 years in which the borrower can borrow plus a repayment period which can last up to 20 years. When the borrower withdraws money from the HELOC, the borrower must pay interest on the amount borrowed (may be required to pay some of the principal) on a monthly basis.
HELOCs are riskier than reverse mortgages because the house is on the line if the borrower defaults on the monthly payments. Origination and insurance costs, however, are less than origination fees for reverse mortgages.
Traditional Refinancing – refinancing lowers monthly payments and spreads the loan balance over a longer time. The borrower will continue to grow equity in the home because the borrower is still making payments on the mortgage loan. Origination and insurance fees range from $2,000 – $5,000. This can be a good option if the borrower plans to pass on the home to heirs.
Downsizing – This can be a good option as the owner can sell the original house and use the proceeds of the sale to buy or rent a smaller house for less money. BE AWARE that, according to Zillow and Thumbtack, sellers spent an average of $15,000 to sell their homes in 2017. Talk with a tax specialist about any capital gain taxes on selling a home if renting or if the next house is valued for less than the sale price of the home sold. And, if buying the next house in cash, your client may have to pay closing costs.
