Baby boomers are increasingly turning to their adult children for financial help. This puts the adult children’s own finances in peril. One option that should be considered is a reverse mortgage. Although boomers have been hesitant to consider this financial product, their adult children — part of the so-called sandwich generation — seem to hold fewer reservations about reverse mortgages and could talk to their parents about this option.
It’s no secret that Americans are experiencing financial challenges. Now, more than ever, they are looking for someone to trust. Mortgage originators are often considered trusted advisers by their clients, and many originators have extensive databases of clients who have purchased and refinanced with them over the years.
Today’s economic realities mean that many baby boomers need their equity to adequately retire with a high quality of life.
Taking a closer look at the borrowers in this database reveals the sandwich generation — people in their 40s and 50s who are financially caring for both children and parents and thus have more challenges than ever before. As it happens, about one in three people of the Generation X and millennial segments of the population are helping with their parents’ finances (29% for millenials and 32% for Gen X), according to a 2020 survey from health insurance marketplace GoHealth.
“For many, the financial and economic burden of managing a parent’s health and day-to-day activities is putting their future at risk,” the report stated. As a mortgage professional, you have likely helped this demographic to refinance over the past several years — and hopefully did a good job for them. Why not help them and yourself by having a proactive discussion about responsible use of home equity in retirement?
Trusted adviser
As mortgage originators aim to help people navigate these thorny financial issues, a reverse mortgage should be one of the options. Before you dismiss this idea, here are some facts to consider.
Interest rates are rising and this loan product is less rate sensitive once you learn the details. For-sale housing inventory is low and a reverse mortgage can help your clients compete with other bids without depleting all of their capital (a win-win).
Reverse mortgages are safe, excellent options that provide a dynamic tool to the originator’s product mix. But they are not a commodity and you don’t “take the order.” It is an opportunity to become a trusted adviser and engage with a family, thus creating a much less transactional relationship.
Today’s economic realities mean that many baby boomers need their equity to adequately retire with a high quality of life. If you don’t have this loan in your tool belt, another originator will.
Lingering misconceptions
When someone mentions a reverse mortgage, at least two preconceptions may arise. The first is that the borrowers will no longer own their home if they take out a reverse mortgage. This is false — the lender places a lien on the home, but the borrowers always retain the title.
The other misconception is that borrowers will lose their house and have nothing to give their kids. This is connected to the notion of homeownership and having assets to pass on to the children, but the reality is that the reverse mortgage is just like any other mortgage.
The effect of women earning less translates into having less money in retirement. This naturally leads to women looking for creative retirement solutions.
Here’s the catch: If a borrower does not repay a traditional mortgage on time, they can lose their house. If the borrower of a reverse mortgage does not repay (usually when every borrower or spouse has died or no longer lives in the home), the property must be sold to satisfy the loan. But wait, that’s not a catch. It’s the same concept as a traditional forward mortgage, and no one runs around objecting to traditional mortgages because they understand how it works and what is needed to repay.
Ethical originators take care to ensure borrowers and their families understand the repayment obligations of a reverse mortgage, and they encourage good communication between senior borrowers and their adult children. All potential reverse mortgage borrowers must receive federally approved and independent loan counseling. As for grandpa passing away and grandma being kicked out of the home they shared? That should never happen, and thanks to new rules passed in 2014 and 2015, non-borrower spouses enjoy expanded protections under federal law.
There really aren’t any “gotchas,” only misunderstandings. If the borrowers continue to live in the home, pay their property taxes and homeowners insurance on time, and keep the home in good repair, their loan won’t come due until their lives end or they move out permanently. There are even exceptions for staying in a short-term care facility. The key, as with so many things in life, is education.
Financial flexibility
Mortgage originators, how are you planning to retain clients during a time of rising interest rates? What if you could solve this problem, and more importantly, assist your client who wants to age in place but might not be able to do so if they’ve leveraged all their equity by refinancing?
Generational lending builds long-lasting relationships with clients. And reverse mortgages provide continuation of the relationship by helping borrowers address new needs that may arise as they age. If a 63-year-old borrower comes to her loan officer who helped her buy a house 15 years ago, and she asks whether she can create some cash flow for retirement, many originators are going to think of a home equity line of credit or a refinance. But why not a reverse mortgage?
The borrower will receive proceeds at funding, won’t have any mandatory monthly payments until the loan is due and can use the proceeds to supplement her lifestyle as needed. The originator receives a fee and the loan will most likely be sold to an investor, so there’s nothing to keep on the books for servicing. Everybody wins.
And note that “she” is the pronoun of choice for a reason. Data from the National Association of Realtors shows that single women are the second largest cohort of all homebuyers behind married couples, and single women are also the largest cohort who take out reverse mortgages, according to the Consumer Financial Protection Bureau.
Coincidentally, they need these resources the most. The effect of women earning less translates into having less money in retirement. This naturally leads to women looking for creative retirement solutions. Mortgage originators have a unique opportunity to provide education for a population that needs financial flexibility in order to retire.
Potential uses
For those who have never originated a home equity conversion mortgage (HECM), here is a view into how these loans compare to other loan products. The HECM is a loan endorsed by the Federal Housing Administration (FHA), which comes with the benefit of government insurance for the lender.
All HECMs are reverse mortgages, but not all reverse mortgages are HECMs. A handful of reverse mortgage lenders offer private-label, originator-branded, equity-release programs for retirement purposes. They may offer benefits not available in FHA programs, such as jumbo loans or a lower age limit.
There are some common characteristics for any reverse mortgage. It is a loan product that enables older homeowners (typically age 62 and older) to convert a portion of their home equity into cash. Just like any other loan, the borrower remains the owner of the home and retains the title.
There is no mandatory payment, but a payment can be made. The amount of equity tapped is determined by the borrower’s age, the home’s value, any outstanding mortgage balances and the interest rate. The borrower must continue to pay property taxes and homeowners insurance while keeping the house in good condition.
This product has the potential to be useful to older Americans. And it’s a possible way for the sandwich generation to help their parents navigate through retirement while also being able to retire themselves one day. ●
