There is no question that a regular mortgage can change your life. A regular mortgage, meaning the kind where you borrow a certain amount of money and pay it back monthly. When you buy a home in a neighborhood that you choose, your whole family’s life improves in so many ways. When you buy a second home, your life changes in that you expand your relationships and possibly weather choice options. When you invest in a property, your wealth may change.
Soooo … What type of mortgage financing really has life-changing effects, not only helping the borrower, but perhaps the family as well? The answer is a reverse mortgage. Just what exactly is a reverse mortgage?
Before getting into the details, let me describe a recent situation I assisted with to illustrate one of the powers of the reverse mortgage.
A parent’s child called me to ask how he could keep his mom in her home. There was money, but over time the money had eroded. The kids had obligations of their own. The mom was incapacitated. The existing mortgage was not being paid, and the risk of foreclosure was looming. What is there to do if the family wants their mom to age in place and not be forced to sell the home? You guessed it. Take advantage of one of the best financing tools around: a reverse mortgage. It took five weeks to close.
What did we accomplish? They had an existing mortgage. We paid off the existing mortgage and eliminated $50,000 of annual debt. We created a set life expectancy set-aside (known as a LESA) to pay real estate taxes and insurance over six years and that had a remaining line of credit left to tap when needed. I also want to add that reverse mortgages are not just for tough situations, but strategically used to preserve wealth as well.
Let’s get into a brief introduction as to what a reverse mortgage is. A reverse mortgage is a mortgage that can allow borrowers 62 years or older (or 55 with some new products) to purchase a property or tap the equity in their home by accessing tax-free cash—speak with a tax adviser—without having to make any monthly mortgage payments. (Real estate taxes and insurance must still be paid.)
How Do You Qualify?
1. The borrower on title must be the minimum required age (a non-borrowing spouse may be under age 62). Proprietary, non-government products may allow ages 55 to apply.
2. The home must be the borrower’s primary residence.
3. The borrower must own and live in the home as a primary residence.
4. Borrowers must continue paying property taxes and homeowners’ insurance, maintain the home, and otherwise comply with the loan terms.
Types of Reverse Mortgages
1. Home Equity Conversion Mortgage (HECM): Reverse mortgage insured by the Federal Housing Administration. It can be a line of credit or a fixed-rate product. An HECM reverse mortgage allows those ages 62-plus to age in place by turning equity into a working asset. The equity available is typically 40-70%, based on age and interest rate. The lender makes income tax-free payments to a homeowner, but borrowers must consult their tax professional to make sure that Medicaid or social services they may receive is not affected. FHA insured, non-recourse loan (no liability above home value). Repayment is deferred until the home is permanently vacated or sold. Both fixed-rate and adjusted products available
2. Proprietary Reverse Mortgage: Offered by lenders and not insured by FHA—Borrowers may use proceeds for more than one purpose. May allow certain properties that the FHA product does not. Proprietary products, provides more options and choices to borrowers. Typically for larger loans but can be used for other situations that an HECM may not apply. Offered by lenders and not insured by FHA. Borrowers may use proceeds for more than one purpose. Also, a non-recourse loan: Only the home collateralizes the loan.
Strategic Uses of a Reverse Mortgage for Retirement Planning
1. You can delay taking Social Security benefits and let investments grow. Determining when to take Social Security is one of the most important decisions a retiree can make because it’s lifetime income. You can use reverse mortgage proceeds to delay taking Social Security benefits for as long as possible, allowing you to receive a greater monthly income in the future.
2. Protection from investment downturns. A reverse mortgage may help minimize risk in retirement during your investment portfolio’s volatility cycles. The strategy would be to take a reverse mortgage after 62 years of age, but only drawn upon it if the portfolio underperforms to allow a recovery using a sequence of returns strategy.
3. Grow retirement with the HECM growing line of credit. The reverse mortgage’s
unused portion of the line of credit grows at an interest rate that is equal to the current loan rates. This line of credit also includes a compounding feature so that available credit increases each period on the prior period’s available credit balance. At any time, the line of credit can be accessed for incidental cash or even converted to monthly term or tenure payments, like annuity payments.
Using these active strategies, cash reserves are made available upfront and incorporated into a plan, giving your portfolio the maximum amount of time to grow and the best possible chance of survival. You can still live in your home without making monthly mortgage payments, feel confident about being financially prepared for emergencies, have a growing line of credit available to you while improving your Social Security opportunity—all while maintaining your desired quality of life. Simple and effective.
Important Consumer Safeguards
There is no prepayment penalty.
Non-recourse loan HECMs are considered non-recourse loans. Neither you nor your heirs will ever owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt.
Major change! A Non-borrowing spouse is a spouse under the age of 62. New loan amounts are available to borrowers with a non-borrowing spouse under the age of 62. New rules also allow the eligible spouses (under 62 years of age) of borrowers who pass away to stay in the home without foreclosure. The surviving spouse must continue to pay taxes, homeowner’s insurance, home maintenance, and otherwise comply with the loan terms.
When Is a Reverse Mortgage Due?
Maturity Event) The home is sold, The home becomes vacated/abandoned, Borrowers leave the home and do not plan to return for more than 12 consecutive months, The last surviving spouse passes away, Nonpayment of taxes, insurance, or property upkeep, The borrowers or the heirs should let the servicer on the loan know when a maturity event has occurred, The servicer will work with them to determine how the loan will be repaid. Typically, the servicer will order an appraisal to determine the value of the home at the time, Then, when the home is sold … Reverse mortgage payoff will be deducted from the sale proceeds, Any additional money from the sale of the home is passed on to the borrower or their heirs, They could also choose to keep the home and refinance it in their names.
Target Client Profile—SFR, PUD, 2-4 unit (if the borrower lives in one unit), condo. (If a condo, must be FHA Approved or be able to pass FHA’s Spot Condo Approval or Proprietary loan requirements) Some repair set-asides may be allowed, but cannot be for structural issues or a risk to safety or health.
Benefits of a Reverse Mortgage Over a Traditional Refinance
Eliminate mortgage payment to free up needed cash, Home improvement, Emergency funds for medical, home repairs, family, Eliminate other debts, Assist family members, Travel, Alternative funds to access when retirement accounts drop in value, Allows time for market rebound and avoids cashing in stocks at lower value (Always speak to your financial advisers), No prepay penalty, non-recourse loan, Equity line growth built in, Eliminates need to refi as values increase.
Borrower responsibilities: Maintain Homeowners Insurance, Stay current on Property Taxes, Maintain the condition of the home, Continue to occupy the property as their primary residence.
Counseling: Must be done with an approved Counseling agency provided in the Initial Proposal Package—All borrowers, Non-borrowing spouses, POA’s/Conservators or other non-borrowing owners must attend counseling—Can be done face to face or over the phone and in compliance with state regulations—Once completed, a Counseling Certificate will be issued—Borrowers must sign and date prior to submission.
Not every situation is a fit for a reverse mortgage. Introspection, and sometimes family participation, is important to arrive at the best possible choice for the borrower.
It’s important to examine the “Why,” “Who,” “How” and “When,” if you think of looking into a reverse mortgage.
Why?
If we could unlock some of your home equity into cash, or a line of credit, what are some things you’d like to accomplish? Why are you looking into a reverse mortgage?
Possible answers: To “pay off debt.” 1. How much debt would you estimate in total? 2. What types of debt? Auto loans, mortgage, credit cards? 3. How long have you been making payments on these?
4. How much do you pay on each one, every month? 5. What life events led to accumulating these debts?
Who?
Are others involved in this decision? Who else is on the title? Are there any other liens on the home? Who will inherit the home when the time comes?
How?
There are many reverse mortgage options. How will your life be different once your debts are all paid off? How much will you be able to save every month? Every year? How would it feel if this was the last loan you ever had to do?
The “How” Decision-Making Funnel
What are the alternative options: 1. Sell the house. Then what? Buy or rent in today’s inflated market? Is selling and moving what you really want? If money and debts weren’t a factor, is this the home you would want to stay in for as long as possible? 2. Cash-out refinance. What does that do to your monthly mortgage payments? How would that work towards your retirement cash flow goals? 3. Home equity line of credit. Those have an adjustable rate with an additional monthly payment attached to it, right? Is it a non-recourse loan and protected or insured? Where will you get the money to pay it off when it’s due in full or balloons in 10 years?
When?
How soon would you like to accomplish paying off those monthly debts? What, if anything, would keep you from wanting to move forward at this time? How long have you been thinking about doing something to be able to retire better? Did you know that although rates are starting to rise; that they are currently still under the average historical 50 year look back period? (7.78% average) • Would you agree that it’s important to lock in your equity while home values are still at a record high?
Although reverse mortgages are available, no one strategy fits all. Around the 60-year-old mark many people think about downsizing and either renting or buying a smaller house. One of my favorite strategies is buying a smaller home with a low down payment and short amortization span like a 10- or 15-year mortgage. The strategy I am presenting makes the most financial sense at around 55-plus. The ideal game plan is to have a monthly payment equal to comparable rent, but you get the benefit of building equity and the possibility of an interest deduction. Renting, if you have a below-market rent, may be financially beneficial, and you can pass maintenance off to a landlord, but dollar for dollar, the small-home strategy offers the forced retirement kicker you just may need.
Carl Guzman, NMLS# 65291, CPA, is the founder and president of Greenback Capital Mortgage Corp. He is a real estate mortgage banker and business financing expert with over 33 years’ experience. He currently has 214 5-star reviews on Zillow. Carl and his team will help you get the best mortgage financing for your situation and his advice will save you thousands! www.greenbackcapital.com [email protected]
