Part 2 of a guest series about reverse mortgages by Tony Lopes, Branch Manager/Reverse Mortgage Specialist, Reverse Mortgage Funding LLC (RMF). Be sure to read Part 1, Reverse Mortgages Simplified – Closing the Financial Gap for a New Generation of Retirees.
In our last blog post, we covered the basic concepts of reverse mortgages and how they can help some seniors live a safer and more secure retirement. Over the years the government has added many safeguards to the reverse mortgage program to make it more consumer friendly. In our third post, we’ll discuss those changes and safety measures that have made the program more approachable for a wider range of seniors. For this post, we’re going to discuss the four common uses that borrowers and their advisors utilize to improve financial sustainability through retirement:
1. Cash flow – One of the common uses of a reverse mortgage is to receive monthly payments from the proceeds generated by the reverse mortgage. Borrowers who struggle to make their monthly obligations can convert the equity in their property into tax-free* income, where they will receive a set amount of money per month for as long as they live in the property.** Converting equity into monthly cash flow can allow them to live a more financially secure retirement and in almost every case will increase their probability of financial success in retirement.
2. Standby Line of Credit – In recent years many prominent financial planning researchers have published studies on the advantages of setting up a reverse mortgage line of credit. They specifically looked at coordinating spending of home equity throughout retirement along with other cash assets. When a senior has no mortgage or a small mortgage on a property, they can utilize a reverse mortgage in the same way they would use a home equity line of credit. But in many cases the Reverse Mortgage Line of Credit has advantages over the standard HELOC:
a. Flexible Payment Feature – No monthly principle or interest payments are required, and there is no predefined loan maturity date. A borrower can choose to pay down the loan at any time or defer repayment.
b. Credit Line Growth – The unused credit line will grow over time, giving borrowers access to additional funds if needed.
c. The line of credit cannot be reduced or revoked by the lender, as long as the borrower meets their loan obligations (i.e. timely payment of taxes and insurance and maintaining the home).
d. Government Insured – 99% of the reverse mortgages originated today are insured by the Federal Housing Administration (FHA).
e. Non-recourse feature – A borrower can never owe more than the home is worth when the loan is repaid.
A reverse mortgage line of credit can be an excellent way to plan for unexpected expenses such as healthcare costs, home maintenance, and upgrades, or can just be a safety net for any of the unexpected expenses life throws at us.
3. Paying off an existing mortgage – Reverse mortgages can be utilized to pay off an existing traditional “forward” mortgage. If a person is over the age of 62, has a mortgage, and plans to age in place, a reverse mortgage can be a great way to pay off their existing mortgage. Using a reverse mortgage in this manner helps by freeing up the cash that the senior was paying on their monthly mortgage payment. Depending on the home value and balance on the existing mortgage, there may be additional funds available that can be utilized as a line of credit or can be disbursed monthly to the borrower.
A real example: A couple from Peabody was drawing money from their IRA to make a $1,500 mortgage payment. They used a reverse mortgage to refinance their existing mortgage to lose that $1,500 monthly payment, PLUS they can also draw $1,500 a month in tax-free* cash; which means they have a $3,000 per month positive cash flow swing by using this one strategy.
4. Rightsizing – A reverse mortgage can be used to purchase a home by combining a one-time investment of cash (down payment) with the loan proceeds from a reverse mortgage to complete the transaction. As with a traditional mortgage, the home being purchased secures the loan. However, unlike a traditional mortgage, there are no monthly mortgage payments, which can help increase cash flow. The borrower owns the home as long as they live in it. The loan does not have to be repaid until the home is sold or the borrower is no longer living in the property as their primary residence. For the loan to remain in good standing, the borrower needs to maintain the property and keep current with property related tax and insurance payments.
Through my years as an HUD-approved reverse mortgage counselor and as a loan originator I have seen many creative and helpful ways a reverse mortgage has improved someone’s quality of life in retirement. I’ve listed the common uses, but the less common uses are the ones that have can have the greatest benefit for seniors. Take Mary, who I counseled many years ago: She loved her home in Ocean City, NJ, where she and her deceased husband had lived for over 50 years. She was able to get by month to month but was unable to see her two sons and their families in Florida as often as she would like. Mary was cash poor and house rich, and she decided to see if a reverse mortgage may be able to help her. She was able to get a reverse mortgage line of credit on her property for over $300,000. Having access to this money has allowed Mary to travel to see her grandchildren at least once every six months, and her quality of life is better because of it.
Reverse mortgages aren’t right for everyone. But if someone is concerned about running out of money in retirement, they are doing themselves a disservice if they don’t research whether a reverse mortgage would help them.
* Not tax advice. Consult a tax professional.
**Must maintain the property and stay current with property related tax and insurance payments.
Tony Lopes is an experienced HECM Loan Specialist with Reverse Mortgage Funding, prior to originating loans he spent seven years as a HUD Approved Reverse Mortgage Counselor. Tony is available at alopes@reversefunding.com or 413-478-2013 to help educate borrowers and their families. Branch Address: 1325 Springfield St, Feeding Hills, MA 01030. NMLS # 1408098
Gove Law Office, LLC is a general practice law firm with offices in Northampton and Ludlow, MA. The firm handles a wide variety of legal needs, including residential real estate matters. For more information, please contact Attorney Michael Gove at mgove@govelawoffice.com.