The US is a country where 90% of people over 65 have a home that they own but have an insufficient pension that prevents them from leading a life similar to the one they had before their retirement. For people who are going through this situation, banks have created financial mechanisms that allow them to obtain resources without the need to part with any asset.
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The intention is that older adults can better their consumption capacity through their goods, which is why they have a financial instrument known as a reverse mortgage. We will be discussing an overview of the reverse mortgage in this post, but you can read more about the pros and cons of reverse mortgage here.
Reverse Mortgage
The reverse mortgage is a financial operation aimed at the segment of adults over 65 years of age who will receive a
loan that will be delivered at once or in the form of lifetime monthly payments. This allows the property to be transformed into money but most importantly is that the person does not lose ownership of their assets.
This instrument is considered a great solution for those elderly who do not have sufficient economic capacity to be able to spend a better old age. Now, if elderly people proceed to acquire a reverse mortgage, they don’t need to leave their home they can even issue a will where you leave heirs on that asset.
This action allows the beneficiary to obtain a fixed monthly amount for the next 25 years. This money is generally used for medical expenses and even for trips that the elderly person could never do because he spent a lifetime working and saving. However, when he reached this stage, he no longer had sufficient resources.
At the moment, when the owner of a house dies and leaves the property in inheritance having this a reverse mortgage, the heirs can assume the debt canceling it and in this way keep the mortgaged property. In case of not wanting to pay the mortgage, they should proceed to abandon the property to guarantee that whoever worked throughout their lives to obtain a property will enjoy the results of their sacrifices.
Reverse Mortgage Financial Instrument With Too Many Gaps
Millions of Americans are over 65 years of age and this number is only going to rise in the future. With such a large number of elderly people, the reverse mortgage should have had a greater acceptance by this segment.The majority of elderly people see their purchasing power diminished so that old age passes between deficiencies and needs. So, why do those retirees not accept the bank offer to file a reverse mortgage?
It seems that there are many doubts and that the banks have not wanted or have not been able to clarify. For example, it is already known that an essential requirement is to be over 65 years old and that the amount that will be received for the mortgage loan will depend on the value of the home, which must be greater than $150,000. Also, it is known that the credit can be received in its entirety immediately or monthly.
So if it seems that everything is clear, why don’t older adults opt for this financial product? There is no clarity on this issue but it is estimated that the heirs of the property may intervene since the elderly, when mortgaging the home, continue to maintain ownership of it while they live.
However, at the time of death, the heirs will have to cancel the mortgage with their own money or can even sign a new one or sell it to deliver the loan to the deceased to the bank and distribute the surplus among those who inherit.
Why has the reverse mortgage not been receptive?
There are factors that according to some economic analysts and sociologists influence the low acceptance that reverse mortgages have had, these are:
Little publicity and propaganda by banks:
Currently for banks, offering the reverse mortgage is a situation of uncertainty since the return on capital is directly related to the duration of the person’s life. On the other hand, when the owner dies, the bank continues to maintain uncertainty since it does not know what the decision could be made by the heirs, which can range from the constitution of a new mortgage to the payment of the existing one. Also, if for some reason, the real estate market suffered a rise and the property increased in value in consideration of the reverse mortgage, the bank would be in a situation of loss if the heirs decide to sell the property or keep it.
Family roots:
Since this product is aimed exclusively at the elderly, they, due to a matter of idiosyncrasy, cannot mortgage the family heritage since they would leave without an asset that their children could have in the future. Even according to some studies, there are elderly who live an extremely precarious life with many limitations and they prefer to be that way than to take on a reverse mortgage.
Reverse Mortgage And Its Future
Currently, the demand for reverse mortgages is not great enough to be considered a profitable business for financial institutions. For the
American Banking Association, the regulation of this instrument is not adequately clear and this generates some gaps that prevent its commercialization from being done more actively.
On the other hand, there is a fear of the weak legal certainty that exists with respect to this issue, that is, for the reverse mortgage to be maintained over time and in the future to reach acceptable levels within the products marketed by banks, laws that protect financial institutions from heirs.
In this sense, there have been cases where heirs have challenged the
reverse mortgage arguing that the deceased owners signed the contract without actually knowing the scope of it, that is, they did not know what they were signing.
Sometimes that means selling the home to get money to repay the loan. The Federal Home Administration (FHA) provides insurance to
lenders who issue home equity conversion mortgages, the official name for reverse mortgages typically making these products widely available. Most insured reverse mortgages allow a borrower over 62 to borrow up to 60 percent of the equity in their home. However, the FTC cautions that there are important considerations that homeowners contemplating such a transaction should consider, including the following:
In other words, if laws are not issued that protect the private property even for the heirs, every day fewer financial organizations will dare to commercialize reverse mortgages. This product seems to be lacking in interest and favoritism both in bank customers or users as well as the entities that grant it.
In this sense, what was initially shown as an innovative idea in the US and that in the long run could help improve the quality of life of older adults, ended up becoming a product that is neither commercialized nor acquired.
