Why Accountants May Want to Consider Recommending a Reverse Mortgage
Accountants are hired for their financial expertise and ability to help their clients manage their money. Because clients will have different needs, accountants can help identify ways to plan financial strategies based on those needs and the clients’ goals for the future. For the growing population of baby boomers, retirement is a major concern. For others in that same age group, simply being able to cover daily living expenses is a challenge. There’s no single solution to the problem facing so many aging Americans; however, for some senior homeowners, a Home Equity Conversion Mortgage may be the answer.
The recent recession affected every age group, but seniors were hit especially hard. Uncertainty in the stock market and dwindling government funds prompted a lot of senior citizens to worry about their retirement, asking themselves whether or not they would be able to afford to continue living in their current lifestyle as they age. Sadly, many senior Americans are faced with foreclosure and mounting debt as they struggle to pay for their basic living expenses and medical care costs. To avoid facing such financial woes, many seniors are turning to financial professionals for expert counseling. Accountants who serve clients 62 and older must be aware of this and be prepared to offer solid financial advice to help this age group reach their retirement goals, avoid foreclosure and pay their day to day expenses.
While it is not a good solution for every senior, an HECM may be a great option for older homeowners with substantial equity. Also known as a reverse mortgage, an HECM is a special type of home financing program that allows the borrower to actually receive money, instead of having to make payments. It is similar to a Home Equity Line of Credit, however, with an HECM or reverse mortgage, the loan generally does not need to be repaid until the all homeowners on the mortgage have either moved or passed away.
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Reverse Mortgage Proceeds
With a reverse mortgage, the borrower has the option of receiving money in a lump sum, through monthly installments, or a combination of both. The money they receive can be used for just about anything. Whether it’s paying for basic living expenses and utilities or supplementing retirement income or using it for other investments, reverse mortgage borrowers are free to use their reverse mortgage proceeds in whatever way they like. However, financial professionals and counselors should advise their clients to spend the proceeds cautiously. Ideally, the proceeds should be used either as a last resort to pay bills or as part of a larger retirement plan. Those who take out lump sum proceeds are especially cautioned to handle their money wisely, and they should have a financial backup plan in place once the lump sum runs out.
In order to qualify for a reverse mortgage, the borrower must be at least 62 years of age and owe nothing (or almost nothing) on their current mortgage. (There are other rules and guidelines that apply; talk to an experienced reverse mortgage lender for details.)
Taxes & Insurance
Although reverse mortgage borrowers are not required to make monthly mortgage payments, they are still responsible for maintaining their property, paying property taxes and paying their homeowners insurance premiums. Failing to do any of these things may cause the loan to be called due, and if the borrower is unable to pay, they could lose the home.
Reverse mortgage products have suffered some negative press in the past. This was largely due to unscrupulous lenders who preyed on naive seniors. Furthermore, the reverse mortgage’s original design left some borrowers vulnerable to cashing out early, leaving them without the necessary funds to maintain their property, taxes and insurance. This would inevitably lead to the loan being called due and the borrower being unable to repay. This hurt the homeowner as well as the FHA.
Now that some of the laws have changed, it has become increasingly difficult for homeowners to get in over their heads with a reverse mortgage. Not only are reverse mortgage borrowers required to receive mortgage counseling, some loans actually require them to have an escrow account to cover property taxes and insurance so they don’t fall behind on those payments.
It’s also become harder for shady lenders to push reverse mortgages on homeowners without disclosing all of the facts. Tighter enforcement of the Truth in Lending Act and more aggressive educational efforts by consumer advocates have helped borrowers become less vulnerable to reverse mortgage scams.
Accountants should stay on top of these changes so that they can accurately relay the information to their senior clients. They should also be prepared to go over alternatives, if they feel that a client may not be a good fit for a reverse mortgage.