September 2014 Bar Bulletin
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September 2014 Bar Bulletin

Reverse Mortgages:

A Retiree's Potential Long-Term Financial Planning Tool

By Harold K. Prukop, Jr.

 

A reverse mortgage is a government-insured home loan that allows the owner of a house, condominium or multi-family home used as a primary residence to convert some of the equity into cash.

Such mortgages differ from a traditional loan in that the money does not need to be repaid until the home: 1) is sold; 2) is no longer used as a principal residence, i.e., the borrower fails to live in the residence for 12 consecutive months; 3) the owner fails to pay homeowner's insurance or annual real property taxes, or keep the property in reasonable repair and condition, e.g., pay utilities bills and the like; 4) the last surviving borrower passes away; 5) the borrower sells the house; 6) the last surviving borrower goes permanently into a nursing home (or care facility equivalent); or 7) otherwise fails to meet the requirements of the mortgage.

In fact, with a Home Equity Conversion Mortgage (HECM), the lender pays the borrower according to the payment plan the borrower selects.

20 Key Points

1. A homeowner could receive more money in payouts that cumulatively are more than the house is worth at the time of the loan: For example, if (a) the homeowner is 62, which is the earliest age to qualify; (b) is approved for and receives a $173,000 equity payment; and (c) an income stream of $1,000 per month is approved, in 20 years (or after 240 payments) that's $240,000, and $360,000 over 30 years. This is a potential outcome, but bodes well for healthy seniors with long lives in their historical genetic makeup, and because people are living longer.

2. Although there is a variety of HECM lenders, they are all insured and regulated by the Federal Housing Administration of the Department of Housing and Urban Development (HUD). This has provided more practical safeguards, better consumer protection and some attractive new features.

3. There is a limited amount of home value that can be borrowed against. Also, there are no more excessive first-year payouts to retirees; thus, the maximum first-year payout is 60 percent of the maximum loan value, or the borrower faces a much higher insurance premium if the payout exceeds 60 percent. The HECM lending limit, depending on certain factors, is $625,000. Reverse mortgage money is not taxable income.

4. There is no credit check to apply for a reverse mortgage; credit is not a qualifying factor. There is a mandated, third-party financial counselor appointment, either over the phone or in person, with an independent, unbiased and HUD-approved counselor, before applying for the loan. Typically, once this is done, the consultant or other advisor will order the home appraisal and title work. Presuming the application for the reverse mortgage with a line of credit (LOC) option is approved, the borrower pays the closing costs, but initially does not need to borrow any funds except for closing costs, which may be around $8,000 to $10,000 depending on the home value, state and other requirements. Most borrowers roll this amount into an LOC, but some pay it out of pocket.


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