For many older Delawareans, particularly those who’ve paid off their mortgages, their home is a pile of money. The only question is when and how best to cash in.
Two popular options include selling the home and moving closer to adult children, or remaining there and letting heirs collect its full value. But there is also a third option that might be right for some: a reverse mortgage.
“Think of a reverse mortgage as similar to a regular home equity line of credit where you can access equity funds as desired—lump sum, monthly payments or draws as needed,” says William Starnes, senior wealth advisor with Mercer Advisors in Hockessin. “The cash is incredibly flexible and can even be used to pay off an existing mortgage in order to stop mortgage payments altogether.” And the borrower can live in the house until death, disability or downsizing causes them to leave.
But there are serious questions that should be asked—and answered—before anyone commits to a reverse mortgage. How does it work? Who is a good candidate? What would I do with the money? When is the bank or other lender paid back? And most importantly, is it safe?
The best overview is provided by the U.S. Consumer Financial Protection Bureau: “A reverse mortgage loan, like a traditional mortgage, allows homeowners to borrow money using their home as security for the loan. Also like a traditional mortgage, when you take out a reverse mortgage loan, the title to your home remains in your name. However, unlike a traditional mortgage, with a reverse mortgage loan, borrowers don’t make monthly mortgage payments. The loan is repaid when the borrower no longer lives in the home. Interest and fees are added to the loan balance each month and the balance grows.”
“In Delaware, you have to be 62 to be eligible and to qualify for federal insurance,” says Jeff Ruben, president of WSFS Mortgage, one of the handful of traditional Delaware banks offering reverse mortgages. “Most borrowers tend to be in their mid-to-late 70s and have accumulated greater value in their homes. … But unlike with traditional mortgages, the borrower doesn’t have to run the gantlet of credit checks needed to see if they can pay back the mortgage.”
As John Thomas, Delaware loan officer for Primary Residential Mortgage Inc., points out, “Most people tend to get a reverse mortgage because they have a limited cash flow, and a reverse mortgage can provide that.” Thomas also notes that in Delaware, potential clients are required to have approved financial counseling, which may come from community organizations or even YWCA programs.
“Most people tend to get a reverse mortgage because they have a limited cash flow, and a reverse mortgage can provide that.”
—John Thomas, Delaware loan officer, Primary Residential Mortgage Inc.
“Like most mortgages, reverse mortgages have costs, such as interest payments, origination fees and closing costs,” Starnes says, with the largest additional costs being government-mandated mortgage insurance premiums to protect the bank from ending up with a house worth less than the loan and to protect the borrower from a bank that goes under. “But these upfront costs are rolled up into the loan amount, resulting in no out-of-pocket expenses for the borrower.” Realtors are not typically involved in reverse mortgages.
In addition to the mandatory financial counselors, Ruben adds, “We recommend the borrower’s family, especially potential heirs, be part of the discussion. There shouldn’t be any surprises.”