A NOTE TO TRUSTED ADVISORS:
Our goal is to work with trusted financial and legal advisors to help determine if a reverse mortgage meets the needs of your client. We will provide detailed loan scenarios to you (with your client’s permission) and a personal consultation with one of our staff to help reach a decision that is in the best interest of all parties. We are open and honest with all of our clients about the advantages and disadvantages of a reverse mortgage.
THE 4 TYPES OF PEOPLE WHO WOULD BENEFIT FROM A REVERSE MORTGAGE
While each client’s unique case will differ, we have found that there are 4 types of people who a reverse mortgage is right for:
- Retirees who do not have children – 1. With no heirs, there is no need to worry about passing on the equity in your home.
- Retirees who need income now or in the future – If you need income now, it’s a no-brainer! If you don’t need it right away, it’s still better to set up your Line of Credit or monthly payments before you need them. You can always adjust how you like to be paid in the future.
- Homeowners with a current mortgage on their home – 1. The first thing a reverse mortgage does for you is eliminate your current mortgage. You won’t’ have to make any mortgage payments for as long as you live in your home.
- Retirees who do not have Long Term Care Health Insurance – 1. A reverse mortgage line of credit can be a useful tool for unexpected medical costs, or to live out the rest of your life in the comfort of your own home, rather than in a nursing home.
Reverse mortgages provide many advantages for the senior borrower. Here is a short list of just a few:
- Improves a senior’s standard of living, or allows them to live out their dreams.
- Maximizes Social Security Income: proceeds received from a reverse mortgage do not affect Social Security or Medicare.
- Allows seniors to maintain their independence while living in their own home.
- Provides money for in-home health care or medical expenses.
- Provides access to their home equity, without requiring monthly mortgage payments. (Borrowers must continue to meet ongoing property obligations such as homeowner’s insurance and property tax payments.†)
- Pay off existing mortgage, freeing up monthly cash flow which would have been committed to ongoing mortgage payments.
- Could allow senior to purchase a new home with no monthly principal and interest mortgage payments.
- Could provide source of cash flow while borrower allows their investments to recover from market losses.
- Spends part of the equity that would be passed on to the estate or heirs.
- A growing loan balance will decrease equity over time.
- May affect eligibility for needs-based programs such as Medicaid.
- For those itemizing tax deductions, a reverse mortgage can eliminate the deduction for home interest if no interest is paid out of pocket. However, if the homeowner pays the upfront fees and the accruing interest, the homeowner deduction may be available to them in the year the interest is paid.
- Closing costs, if any, and insurance are important financial considerations, which means the borrowers should plan on living in the home for several years to justify overall costs†.
FHA Insurance & the Reverse Mortgage
Most reverse mortgages or Home Equity Conversion Mortgages (HECMs) are insured by the Federal Housing Administration. FHA requires a Mortgage Insurance Premium (MIP) to be collected at closing and during the life of the loan. This insurance provides the following protections and peace of mind for borrowers and their children:
- You will never owe more than what your house is worth.
- If the loan balance exceeds the value of the home, FHA reimburses the lender for the difference when the estate sells the home, leaving no possible debt to heirs.
- FHA insures payments made to the borrower by the lender. If the lender is unable to continue making payments, the payments would be made by FHA.
- FHA also insures that borrowers can live in their home as long as basic loan obligations are met (homeowner’s insurance in force, property tax payments current and the home maintained in good condition). Even if the loan balance grows and exceeds the home’s present market value, as long as the borrower meets these obligations, the lender cannot take title†.
- The line of credit cannot be cancelled, and it grows over time, meaning the line of credit could exceed the home value in the future.
†Courtesy of Reverse Focus, Inc, ©2016. All rights reserved.