by Mark Schumacher, Home Equity Retirement Specialist, Security One Lending
In 1989 the Federal Housing Administration (FHA) insured their first reverse mortgage (RM). In 2015 that number will be approaching 1,000,000. With more and more baby boomers meeting the minimum age requirement of 62, increased growth of the program is expected.
The RM is a loan for homeowners age 62 and greater that allows them to access equity in their home without having to make any monthly mortgage payments. The home must be a primary residence and the loan proceeds are generally tax-free. Unlike most home equity lines the RM can’t be frozen or reduced and the funds are guaranteed to be available by the government. Also, the loan doesn’t “reset” after any period of time so once it is in place you need not worry about re-qualifying down the road. This makes the RM very reliable for retirees wanting to use home equity as a backup for rainy day events. The homeowner’s responsibility to keep the loan in good standing is to stay current on property taxes, homeowner’s insurance, the upkeep of the home, and association dues if applicable. Borrowers are still the homeowner of record. Their names remain on the deed.
The RM comes due once the home is no longer the borrower’s primary residence. This typically occurs due to death, sale of the home, or the borrower moving out for 12 consecutive months. The heirs inheriting the home decide if they want to keep the home or sell it. However they decide to pay the loan back they have no personal liability for its payback.
About half of RM borrowers own their homes outright when they get the loan. For the other half, any loans or liens against the property must be satisfied at time of closing so loan proceeds go toward those items first. Borrowers can receive/access the remaining loan proceeds via monthly payments, initial draw or lump sum, line of credit, or any combination of these.
Perhaps the greatest misunderstanding about RM is how it is best applied to improve retirement outcomes the most. The program has long had the perception that it is a “program of last resort”. High closing costs were traditionally a big reason for this thinking. While it is still possible to have high costs when getting a RM it is also possible now to have very low closing costs, even less than 1,000 total. Ironically, it’s the homeowners using the program as a last resort that typically pay the highest closing costs and the homeowners that set it up early that pay the least.
With so many retirees having a significant part of their total wealth tied up in home equity, leaving this sizable asset on the sidelines of the retirement income game plan can be detrimental to the entire plan. Research done by the financial planning industry has proven that the most effective application of the RM is setting it up early in retirement, preferably years before the client has any intention of using money from the loan. By doing so homeowners secure their benefit amount and by leaving the benefit in the line of credit it is guaranteed to get bigger for them regardless of what the home value is in the future. With line of credit growth rates near or exceeding 4% it’s not hard to see why establishing the RM early rather than late is a big benefit to the homeowner.
There is another option available for people age 62 and greater that are purchasing their next primary residence. It’s called HECM For Purchase (H4P). H4P allows a homebuyer to bring approximately half of the purchase price to closing as a 1-time down-payment, the H4P provides the other half, and the homebuyer has no monthly mortgage payment. Most homebuyers in this age range aim, or at least very much want, to avoid having any monthly mortgage payment. The down side of paying cash is all the cash it takes to do so. H4P allows buyers to purchase their dream home, add significant sums of money to their retirement reserves, and still not have a mortgage payment.
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