October 17th, 2018 1:40 PM by Jackie A. Graves, President
Many Boomers today are facing an unpleasant
future. Their golden years were supposed to be fun, relaxing and carefree, but
now reality has set in, and they find themselves financially unprepared. Many
didn’t save enough during their working years because they planned to sell
their homes and live off the equity by moving to more affordable locales. The
problem is that two-thirds of the average retiree’s net worth is in the
form of home equity at
a time when more are wanting to retire at home rather than selling and moving
to Florida, Arizona or other warm climates.
Many may be tempted to explore the reverse mortgage option as a
way to increase their retirement income. Doing so means the elimination of a
mortgage payment, assuming payments are still being made, and the ability to
receive a portion of your homes equity. Reverse mortgage recipients are then
able to use the money for anything. Some may choose to blow it on a new car or
motorhome, while others may wisely use it to supplement their income in
retirement. Still, others may need it to pay for medical care or costly home
For divorcing couples, a reverse mortgage may allow one spouse
to stay in the home while giving the other spouse funds to find a new home. A
“for purchase” reverse mortgage option is also available for those interested
in purchasing another retirement home. Essentially using the home equity to
fund the purchase of a new home. Keep in mind that the loan will come due when
the last surviving borrower either passes away, sells the home or leaves the
home for more than 12 months due to illness.
Options for taking the Reverse Mortgage Money
How much you will be able to borrow with a reverse mortgage will
depend on your age (or the age of the younger spouse), the value of your home
and current mortgage rates. Assuming a five-percent interest rate, a
62-year-old borrower could potentially qualify for an initial payout of about
42% of the home’s value. This is capped by the Federal Housing Administration
limit of $679,650.
The good news is this money will come to you tax free because
you are technically receiving loan advances rather than income. For retirees
this is huge. It means the reverse mortgage won’t affect what you pay for Medicare
or how much of your Social Security ends up being taxed. Yes, Social Security benefits can be taxed.
For low-income retirees, it also shouldn’t affect your eligibility for
Medicaid. According to the National Reverse Mortgage Lenders
Association "the proceeds from a reverse mortgage do not impact a
person’s eligibility for Social Security or Medicare, but it could impact
access to means-tested programs, like Supplemental Security Income (SSI) and
Medicaid. To avoid problems, a Medicaid or SSI recipient must use the proceeds
from the reverse mortgage in the same month that they are received."
Essentially retirees who are receiving these benefits will need to spend the
money they receive via reverse mortgage payments each month. As opposed
to saving them up over time.
There are sometimes substantial up-front costs to obtain a
reverse mortgage so you will likely want to plan on staying in your home for
several years to help offset those costs. If you don’t spend the money you’ve
pulled out you can prepay the loan balance without penalty whenever you like.
This sounds easier to do than it probably will be in reality. Few people take
reverse mortgages who don’t need the money. If they wanted to pay back the full
amount taken, without selling the property, most wouldn’t have the substantial
assets needed to do it.
There are a variety of reverse mortgage payout options. Which
one is best for you will depend on your financial needs and goals. During the
first two years, you can borrow the maximum amount for which you have
qualified. A line of credit will offer the most flexibility. You can tap into
this on an as needed basis or keep it in reserve in case money is needed for
For borrowers who need income now, you can choose fixed monthly
payments. This can be in tandem with an additional line of credit. There are
three ways you can take these fixed reverse mortgage payments.
Reverse Mortgage Term
Payment- provides a fixed monthly payment for a certain period of time.
If you take the term payments, you will not receive any payments beyond the
term. This could be a good option for older seniors who needed extra money for
in home care.
Reverse Mortgage Tenure
Payment- provides a fixed monthly payment. Amounts will be based on your
age assuming a life expectancy of 100. Payments will remain in force until the
borrower dies, sells or leaves the home for another reason. Payments will
continue even if your loan balance grows beyond the total value of your home.
Modified Tenure Payment
and Modified Term Payments- These types of reverse mortgages combine either payment type
mentioned above with a line of credit. You will have the benefit of a
guaranteed base income combined with the benefit of access to a growing line of
Lump Sum Reverse
Mortgage- When used properly, this can be the best option for some
retirees. On the other hand, when used badly this can turn into a disaster.
Because this is a one and done deal, if you take the lump sum and spend it, you
are essentially out of options. You will be out of money. At that point, the
only option would be to sell your home if you need further funds to live.
Only choose this option if you are comfortable handling large
chunks of money, using it for specific large expenses (that you can afford)
like long-term-care insurance, a needed home
renovation or paying the taxes on a Roth IRA conversion. Taking the lump sum
without a spending plan will not likely end well.
Terms Vary – Shop Around
Before pursuing a reverse mortgage, discuss it with your financial plannerand tax professional. You’ll
want to have a plan for how to use the money and how it will fit into your
overall retirement plan. Make sure your financial planner is working as a fiduciary and
not earning a commission for selling you the reverse mortgage. Put more
plainly, you want to make sure you are getting unbiased advice.
A lender can help give you the basic information about what
amounts you may qualify for with a reverse mortgage. Keep in mind that you may
receive different terms, rates and amounts from different lenders.
Ideally, you’ll want to get at least three quotes. Make sure
each proposed reverse mortgage shows a selection of margins and also
illustrates how your choices affect the up-front cost and net payouts. The
Federal Housing Administration (FHA) allows lenders to charge an origination
fee equal to the greater of $2,500 or 2% of your home’s value (on the
first $200,000 of value), plus one percent of the amount over $200,000.
Lenders are allowed to charge less, of course.
You will also likely be responsible for a range of other fees
for third-party services. These include services such as an appraisal,
title search, insurance and inspection which can easily run another $2,500 or
more. Costs will vary by location and value of property and you’ll be able to
pay up-front costs from the loan proceeds or pay them out of pocket.
Generally, lenders charge a fixed interest rate on lump-sum
payouts whereas most other types of payouts come with a variable interest rate.
Typically, you will see rates tied to an underlying index such as the LIBOR
plus a margin, which can often range from 2.5% to 4%. Most often the higher the
margin the lower the original fee. You may also be able to negotiate a credit
against the closing costs in return for a higher margin.
Loan officers are sometimes paid by the amount that you
initially borrow. This could lead them to recommend taking more money sooner or
pushing the lump sum option even when a tenure payment may be more beneficial
to you. This is when the fiduciary financial planner comes in to help you pick
the best option for your specific needs.
with a Reverse Mortgage
terms of the reverse mortgage will require you to maintain the home. You will
still be responsible for paying property taxes, which for many is a major
portion of their “mortgage payment.” Homeowner’s
insurance, homeowner’s dues or condo dues will still be your responsibility as
well. Not complying with these requirements will mean you run the risk of
defaulting on your reverse mortgage. If lenders assume you won’t be able to
handle these costs, they will set aside funds from your payout, in an escrow
account, to pay those bills on your behalf.
Having the reverse mortgage in the name of one spouse can cause
some additional challenges down the road. Once the borrow leaves the home, due
to death or another reason, the lender may ask an eligible non-borrowing
spouse or committed partner to stay in the home. This can leave survivors in a
financial crunch as they will need to continue to maintain the home and pay
required expenses. But, they will no longer be able to take money out of the
The good news is you can’t owe more than the value of your home
when it is sold to repay the reverse mortgage. Once you have passed, if your
home sells for more than you owe, your heirs will be allowed to keep any
leftover equity. If your heirs should want to purchase the home back from the
reverse mortgage company when you pass, they can potentially refinance the
reverse mortgage or repay the outstanding debt or 95% of the home’s appraised
value, whichever is less.
What you need to know to
get a Reverse Mortgage
There are eligibility requirements to obtain a reverse mortgage.
Borrowers must be at least 62 years old, be named on the title of the home and
reside there at least half the year. Your qualified payout amount will depend
on your age, as well as the current interest rates and the appraised value of
your home. Currently, the maximum payout is $679,650 but
some lenders will offer larger “jumbo” reverse mortgages. Generally, the
younger you are, the lower the payout will be relative to your home’s value.
You must also receive financial counseling to ensure that you
can meet your obligations as a reverse mortgage borrower. To find a housing
counselor certified by the Department of Housing and Urban Development (HUD)
call 800-569-4289. Sessions will normally run $125 to $250 and can be
done in person or over the phone.
If you still have a mortgage, you will need to pay it off from
the reverse mortgage loan or other sources. You won’t be allowed to withdraw
more than 60% of your principal limit in the first year. The only exception to
this is if you needed more to pay off existing mortgage debt or make repairs
that are being required by the reverse mortgage lender. Reverse mortgages are
insured by the FHA, and at closing, you will have to pay an initial FHA
mortgage insurance premium equal to 2.0% of the appraised value of the
home. Ongoing FHA
mortgage insurance rates are currently 0.5% of the outstanding loan balance, accrued
annually and paid for when the loan is due.
While no principal or interest payments will be due while you
are still alive and living in the home, you will be accruing annual mortgage
premiums at a rate of 0.50% per year. This is based on the amount you borrow
and interest charges will accrue on any outstanding balance. You may think
these things do not matter but, if you talk to anyone who has tried to get out
of their reverse mortgage, all the little details are extremely important.
Reverse mortgages are sometimes marketed as a solution to all of
a senior’s money problems. They may also sound like a way to more fully enjoy
retirement. However, they can be complicated and hard to understand.
The fees and interest can eat up a substantial portion of a homeowner’s equity.
For many older adults, there are better solutions to financial struggles.
A real estate attorney that I know, who shall remain nameless,
stated “99% of people who think they want a reverse mortgage shouldn’t get one.
It’s a very rare occasion when these are right for the person.” With that in
mind, think long and hard before signing on the dotted line. Explore your other
potential options and make an informed decision.
A previous version of this article listed an earlier loan
ceiling limit. Current limit is FHA's loan limit ceiling will increase to $679,650 up
Source: To view the
original article click here