Reverse Mortgage Information for Retiring Baby Boomers

Editor’s Note: The Boomer Post asked Roger Rheinheimer, of Network Funding, to provide some frequently-asked-questions about reverse mortgage information, an increasingly popular means of helping fund baby boomers’ retirement.

The Housing and Urban Development (HUD) directly insures Home Equity Conversion Mortgages (HECM), also known as reverse mortgages, and HUD’s website is an excellent source for reverse mortgage information for retiring baby boomers. Beginning at age 62, homeowners can tap into the equity in their primary residences, and don’t have to pay the loan back until the house is sold, they move out for a year or more, or, if married, both pass away.

How does the reverse mortgage program work?

The amount of your benefit is calculated using your age and the value of your home. The older you are, the more your entitlement. You and your spouse will never be required to repay the loan as long as you continue to live in your home. When the last surviving home owner passes away, the property is inherited by your heirs and they sell, pay off the mortgage and keep any equity remaining. You never give up title and ownership of your home. Closing costs and any existing mortgage balances are allowed to be funded with the loan proceeds resulting in no out of pocket expenses for those receiving sufficient benefit.

Look at this example (accurate on 02/04/2010):

Your home is valued at $250,000 and you are 72 years old, the program would entitle you to $153,878 which is approximately 62% of the value of your home. Any closing costs and existing mortgages would be paid out of the $153,878, and the balance would be available directly to you as a lump sum payment, line of credit, or monthly income, or some combination of those. If you are older than 72, you would receive a higher percentage and, if younger, a smaller percentage. Remember, you can have a current mortgage that will be paid off with this FHA mortgage. Over half the seniors considering this product today are doing so in order to pay off their current mortgage and eliminating the requirement to make a monthly mortgage payment. Using part of the funds to pay off high interest rate credit card balances also reduces monthly expenses.

You have options of how you want to receive the cash:

You can take an immediate lump sum in cash, a monthly cash payment as long as you reside in the home as your primary residence, a plan for a term of months you select, a line of credit, or some combination of these.

What is FHA Home Equity Conversion?

The technical industry term for this program is the FHA Home Equity Conversion Mortgage (HECM). The program was created by FHA working with AARP to offer a way for senior home owners 62 years of age and older to convert equity in their home to cash, a line of credit or stream of monthly income. The loan requires no repayment while the seniors reside in their home, keep it in good repair, and pay taxes and insurance. And, there are no typical qualification requirements such as employment, income and credit.

Does the lender take my home when I die?

Absolutely not. Whenever the last remaining home owner passes away, the loan becomes due and their heirs still inherit the home. They are able to sell the home and, if there is equity remaining after paying off the mortgage, it belongs to the heirs. Since there is no personal liability on these loans, if there is no equity remaining, the heirs are under no obligation to do anything following the death of the last home owner.

Is the money I receive taxable and will it affect my Medicare or Medicaid?

The income you receive is considered loan advances and is not taxable as income. Also, it will not affect your qualifications for Medicare benefits. But, if you are eligible for Medicaid, it is best to opt for the monthly disbursements to prevent having an amount of assets that might disqualify you for Medicaid. You should consult with a financial advisor if you are uncertain which is the best option in these circumstances.

Why should I consider this FHA program and not a Home Equity Loan with my local bank?

A bank’s equity loan might be a better option for some but you will be required to qualify and repay this loan. Also, with a Home Equity line of credit, the lender has the option to cancel the line of credit at any time due to changes in the market. This will not occur with this FHA mortgage. If your plans are to remain in the home for the foreseeable future, this product is likely a better option.

What are the negatives?

While there is no requirement for out-of-pocket expenses, the closing costs may appear to be high. But, if you plan to remain in your home for the next 4+ years, the annual percentage rate is reasonable and not significantly higher than a traditional mortgage.

How Much Can I Receive?

This is determined by the age of the youngest borrower, fair market value of the home and current interest rate. The percentage of value that you will qualify for increases depending on your age. Here are some examples:
Your Age Benefit as % of Home Value

62 54%
67 58%
72 62%
77 66%
82 70%
87 74%

Remember there are none of the typical credit, income and employment qualifications of a traditional mortgage. You only have to be 62 or older and have enough equity in your home to qualify.

How does this affect our children?

Your children still inherit your home just as they would if there was a traditional mortgage requiring repayment. One of the reasons the initial loan amount is a reasonable percentage of the value is in order to preserve equity for your children. With no payments being required, the balance will grow by the amount of accrued costs but FHA assumes there will also be a reasonable increase in your home value over time. Your heirs would be entitled to any remaining equity after repayment of the mortgage balance.

What happens if one spouse dies before the other?

Nothing changes and the loan does not become due. The loan does not mature until the last surviving home owner passes away or permanently moves out of the home.

What if more is owed on the home than the value at time of maturity?

Although rare, FHA would pay the difference to the lender. You or your heirs are not personally liable for repayment. FHA Home Equity Conversion Mortgages have no personal liability.

Roger Rheinheimer

LIC# MLO-109795, NMLS# 109795
Branch Manager
Network Funding, LP
LIC# CL-130067, NMLS# 2297
711 East Front Street, Suite B
Port Angeles, WA 98362
360.452.1200 Main Office
www.networkwa.com
roger@networkwa.com

Comments

  1. Tom Moseley says:

    My mother in law (may she rest in peace) got a reverse mortgage. She took a monthly payment option. It wasn’t much, but added to her meager Social Security income she survived in dignity.

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