Until recently, we haven’t thought too highly of reverse mortgages. High fees and expenses and inflexible settlement options made reverse mortgages problematic for aging homeowners and their heirs. Now, important changes including the Reverse Mortgage Stabilization Act of 2013 and more recently last April HUDs (Department of Housing and Urban Development) “Financial Assessment” have made reverse mortgages safer for both borrowers and lenders. These changes have lowered the upfront costs and put protections in place to ensure the borrower has a capacity (income test) and willingness (credit) to maintain the property and afford taxes/insurance going forward. With the growing “Aging in Place” movement across the nation, reverse mortgages have become a potential strategy in retirement planning. Let’s look at two examples.
First, keeping your existing home. Let’s say you have a large home with an existing mortgage and would like to live there another 5-10 years and reduce your current expenses. A reverse mortgage might be an answer. You can use the Home Equity Conversion Mortgage (HECM) program to pay off your existing loan and even open a line of credit for future needs. The maximum principal limit or loan amount is based on the value of your home, the age of the youngest owner, and interest rates. Since this loan is insured by FHA (Federal Housing Administration) there is a maximum value of the house of $625,500. Let’s say you are 75 and your spouse is 74. Age 74 produces a principal loan amount of approximately 60% of the home value; i.e. a $375,000 line of credit (“LOC”). Further, let’s say that you have a current mortgage of $300,000. This existing mortgage will need to be paid off at closing, so the net LOC availability would be approximately $75,000 which can be used for emergencies, travel or whatever you wish. Going forward, no monthly mortgage payments would be required and the current payment of let’s say $1,000 no longer goes out each month, therefore increasing your monthly cash flow. Plus the line of credit increases each year by 1.25% above the interest rate so there are potentially more funds available down the road.
Before we leave this example, let’s discuss how a reverse mortgage is paid off. Assuming you are joint borrowers, the loan must be paid off at the earliest of 1) when you both move out, 2) when you sell the house, or 3) when you both die. Also since this is a non-recourse loan you, your estate, or your heirs will never owe more than the value of the home at the time of sale. On the other hand if there is still equity in the property at the time of sale, that remains with you, your estate, or your heirs.
Second, purchasing a house. Let’s assume, on the other hand, you decide to downsize by selling your existing home. Let’s say you find a new home for $500,000 that you love and traditionally would have to seek financing or pull from other assets to complete this new purchase. However, using a reverse mortgage for purchase you qualify again for approximately 60% or a $300,000 loan. The net result is you only have to bring $200,000 of your net proceeds from the “big house” sale to complete the purchase. The remainder of your sales proceeds could be invested and ultimately spent or left as part of your legacy. Again, you will not be required to make principal or interest payments on the new house while you live there. And, again, this is a non-recourse loan, regardless of house prices, interest rates and how long you stay there, you will never owe more than the value of the home at the time of sale. And, if there is still equity when it sold, you, your estate or heirs will receive it.
As you can see, reverse mortgages may be an excellent strategy for some seniors. Of course, every family’s situation is unique and full details are needed to determine if a reverse mortgage is appropriate.
In Charleston, we have found a great source of information on this topic, David Heilman of Franklin Funding. David is one of 130 professionals across the country who have obtained the Certified Reverse Mortgage Professional® (“CRMP®”) designation. These folks not only know what they are doing, they have committed to ethics standards concerning their work. David is part of a national organization, National Reverse Mortgage Lenders Association, whose website, www.reversemortgage.org provides information on reverse mortgage lenders across the country, some of which have the CRMP® designation.
We expect reverse mortgages to be a strategy that will be of benefit to more of our clients in the future and wanted to let you know some of the basics and DWM’s ability, collaborating with appropriate professionals, to help guide you through the process of due diligence and implementation. Please give us a call if you have a question.