Monthly Archives: July 2016

9 surprising ways to use a HECM (reverse mortgage) says prominent Advisor

By Mary Beth Franklin

Reverse mortgages allow homeowners age 62 or older who own their home outright or who have a small mortgage balance to convert the equity in their primary residence into a liquid, tax-free asset. Borrowers can take their money in a lump sum or as a monthly payment, or set up a line of credit. Interest accrues on borrowed funds. Unused lines of credit continue to grow at the same compounded interest rate as the cost of money.

Financial advisers who dismissed reverse mortgages in the past may want to take a second look. Consumer protections have increased and set-up fees have been dramatically reduced. Leading researchers believe reverse mortgages could solve some of the income challenges of retirees who saved too little to finance a retirement that could last decades. Click through to find out the various ways to use a reverse mortgage — some of them may surprise you.

Pay off an existing mortgage

Using a lump sum from a reverse mortgage to pay off a traditional mortgage balance instantly increases a retiree’s monthly cash flow and reduces portfolio withdrawal needs. “It really improves the odds for retirement success to not carry a mortgage into retirement,” said Wade Pfau, professor of retirement income at The American College of Financial Services.

Replace a home equity line of credit

Unlike a HELOC, a reverse mortgage can never be reduced, frozen or cancelled, and there are no monthly loan repayment requirements. A reverse mortgage is not due until the borrowers sell the home, move out permanently or die. The estate or heirs can never owe more than the house is worth, even if it is less than the amount borrowed.

Line of Credit Growth (1)

Protect your portfolio

“Should your portfolio decline significantly in value, borrow from the line of credit for your needs, then repay the loan when your portfolio recovers,” said John Salter, associate professor of personal financial planning at Texas Tech University. Interest payments are tax-deductible if retirees itemize their deductions on their income tax returns.

Fund future long-term care or income needs

A 62-year-old couple with no long-term-care insurance may want to set up a reverse mortgage line of credit. With a home worth $625,000, their initial line of credit at current interest rates would be worth $327,375, according to Tom Dickson, founder of the Financial Experts Network. Left untouched, the equity line would be worth $613,365 in 10 years and $1,149,143 in 20 years, said Mr. Dickson, a co-designer of the reverse mortgage modeling now part of MoneyGuidePro. The couple could tap the loan for future long-term care costs, as long as they remained in their home, or to serve as a deferred annuity if they needed additional income in the future.

Create a Social Security bridge

Supplement income with monthly payments from a reverse mortgage either for a set number of years (term) or for as long as you live in your home (tenure). Term payments can provide an income bridge to allow a retiree to delay claiming Social Security until benefits are worth the maximum amount at age 70, said Shelley Giordano, author of “What’s the Deal with Reserve Mortgages?” (People Tested Media, 2015).

Manage taxes

Proceeds from a reverse mortgage are tax-free. Tapping a reverse mortgage can decrease withdrawals from taxable retirement accounts, reducing income taxes and the amount of Social Security benefits subject to income taxes. For higher-income retirees, tax-free reverse mortgage payments can reduce their modified adjusted gross income that can trigger higher monthly Medicare premiums.

Pay Roth conversion taxes

Sometimes the only thing preventing a retiree from converting a traditional retirement account to a Roth IRA is the amount of income taxes owed on the converted amount. Tax-free proceeds from a reverse mortgage can pay Roth conversion taxes all at once or over several years, reducing future income taxes and possibly reducing future Medicare premiums.

Buy a new home

A reverse mortgage can be used to purchase a new home. Rather than using all of the proceeds from a home sale, downsizers can use some of the sale profits and take out a reverse mortgage to make up the balance, resulting in a new home without monthly payments and additional cash to add to savings for future needs or to supplement current income.

Gray divorce strategy

Older couples can use a reverse mortgage to divide a marital housing asset in a divorce. In one scenario, the spouse remaining in the home can take a lump sum distribution from a reverse mortgage to buy out the other spouse. In a second scenario, the marital home can be sold and each ex-spouse can use some of the proceeds from the home sale and each of them can get a reverse mortgage to buy their respective new homes, according to Shelley Giordano, chair of the reverse mortgage industry’s Funding Longevity Task Force.

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You can HECM to buy another home (with no monthly payments)? HERE’S HOW!

With a home-equity conversion mortgage, seniors can finance the purchase of a new home without monthly payments

Illustration: Chris Gash
By Anya Martin
July 20, 2016 10:47 a.m. ET
HECMS are typically seen as a way for seniors to remain in their homes while drawing income from their property. But a reverse mortgage can also be used to buy a home.

Here’s how it works: Seniors 62 or older buying a primary residence make a down payment and pay closing costs. They then get a lump-sum loan that goes toward the home purchase. No monthly payments are required to pay down the debt. Instead, interest accrues on the loan, and the principal and interest are usually due when the last co-borrower or spouse on the loan moves out or dies.

Most reverse mortgages are FHA-insured loans called home-equity conversion mortgages, or HECMs. The loan amount is a percentage of the home’s appraised value, up to $625,500. That percentage starts at about 52% of the purchase price and rises with a borrower’s age, going up to about 75%.

In general, interest rates on lump-sum HECMs range from 4.25% to over 5%, says Peter H. Bell, president and CEO of the National Reverse Mortgage Lenders Association, a trade group.

If desired, a senior with a reverse mortgage can leave a portion of the proceeds in a line of credit for future use. Interest is charged only on money that is drawn from the line of credit. HECMs that are lines of credit have interest rates starting in the 3% range, but these are adjustable rates that may change throughout the life of the loan, Mr. Bell adds.

Retirees often have trouble meeting underwriting requirements for regular mortgages, which are based on income more than assets, says Richard Mandell, CEO of One Reverse Mortgage, a subsidiary of Quicken Loans. A reverse mortgage “gives retirees the opportunity to move to a different home that better suits their needs, be closer to family or live in a warmer climate,” he adds.

‘If desired, a senior with a reverse mortgage can leave a portion of the proceeds in a line of credit for future use.’

A top concern has been that seniors will draw down their home equity too rapidly, forcing them to exhaust other savings, says Jamie Hopkins, co-director of the New York Life Center for Retirement Income at the American College of Financial Services in Bryn Mawr, Pa. But used strategically, buying a home with a reverse mortgage allows seniors to invest in higher-yield investments than their home.

Ray and Janet Massey wanted a 3,300-square-foot house with a pool in Katy, Texas, a suburb of Houston, but it was listed at about $533,000. Their previous home, also in the Houston area, was worth only $370,000, with a mortgage that had to be paid off, Mr. Massey says.

The Masseys made a $240,000 down payment, and their reverse mortgage paid for the home. They put down another $250,000 to qualify for a line of credit with a variable rate, currently 5.73%, says Mr. Massey, a 72-year-old retired sales manager at an auto-dealership. He and Janet, who at 71 still works as a packaging-sales executive, have access to money if they need it. But any amount they don’t draw grows annually at the current adjustable-rate—even if home values drop, he adds. (Footnote: A growth factor on HECM lines-of-credit nearly makes up for the cost of borrowing so using the money is almost free).

“We’re happy because we don’t have a monthly payment and we can put our money in a safe [federally insured] investment,” Mr. Massey says.

If senior borrowers want to tap more equity from their home than an HECM can provide, two lenders offer jumbo reverse mortgages. Finance of America Reverse offers a loan that typically goes up to $2.25 million and is available in 14 states. The American Advisors Group has a loan that is usually capped at $3 million and is currently available in eight states. Qualification rules and terms of the loan vary by the lender. More considerations:

• Foreclosure possible. Even though the homeowner is not making mortgage payments, a lender could foreclose if certain required expenses, such as property taxes, homeowners’ insurance premiums and homeowners’ association fees, aren’t paid.

• Not under construction. Currently HECM loans cannot be used to pay a builder for a home that is not completed. The FHA is considering a proposed rule that could lift that restriction, Mr. Bell says.

• Non-recourse loan. Reverse-mortgage loan amounts are based solely on the home value at the time of underwriting, which in the case of a purchase is the purchase price. So if the home loses value, neither borrower nor heir is responsible for making up the difference upon a sale.