With the regulatory overhaul over the last three years, and with more to come, the reverse mortgage program has gained positive attention in the national media and financial planning community. But, the basic concepts that every older homeowner should know have remained unchanged for the most of three decades. So, since other blog posts, including my own, discuss changes, this may be a good time to take a breather and review the core of the reverse mortgage program and what it offers.
The following is a summary of the top 10 most important concepts on my list:
- What is a reverse mortgage?
The most common product, known as a Home Equity Conversion Mortgage (HECM), is a federally insured loan product that allows homeowners 62 years and older to access a portion of their equity now in cash or monthly payments, or later from an established line-of-credit.
- What are the primary advantages?
Many clients like the freedom of having no required monthly principal or interest mortgage payments. However, they often miss the advantages gained by making periodic prepayments. Of course prepayments will reduce the loan balance. But when using the adjustable rate HECM, those payments will also boost the government-insured line of credit that is already growing.
- Who use Reverse Mortgages?
Older homeowners seeking reverse mortgages are a mix of those with a need for cash, those who wish to enhance their retirement lifestyle, and those with financial planning motives. However, since 2008, the reverse mortgage has also had the ability to assist those that wish to purchase a home.
- What are the borrower responsibilities?
It is the borrower’s responsibility to occupy and maintain the home. However, he/she is also required to pay the property charges including property taxes and homeowners insurance when due, unless the lender sets aside funds for those purposes.
- What is the most common misconception?
Clearly, the greatest misunderstanding is that the “bank gets your home.” This is not true, and the homeowner retains title and ownership of the home over the life of the loan, and the heirs have multiple options upon the death of the last borrower.
- What do the proceeds potentially impact?
Proceeds are NOT taxed as income. While the HECM may be used to enhance basic Social Security and Medicare, the proceeds don’t adversely affect those government benefits. However, Supplemental Security Income or Medicaid are means-tested programs that may be impacted if caution is not taken.
- What is the “Principal Limit?”
The Principal Limit represents the maximum funds that can be offered at the time of closing. This amount is tied to the relevant ages, interest rates, and the home’s value, but may be restricted in some cases during the first year.
- What is the non-recourse feature?
The homeowners and their estates will never owe more than the value of their homes. This is a great consumer protection for the homeowners as well as their heirs, as there is no personal liability for a deficiency created by falling home prices or a loan balance that exceeds the value of the home.
- Why is counseling required?
HUD felt it was important for the homeowner to be counseled by someone other than the loan originator. Therefore, a reverse mortgage applicant will need to select a HUD-Approved counseling agency and obtain a counseling certificate.
- What are the Financial Planning strategies?
Many are using the HECM to delay Social Security filing. Others will draw tax free distributions from their home equity, allowing them to manage their adjusted gross incomes. This may reduce their tax liability as well as Medicare premiums. Still others will draw retirement cash flow from home equity during down markets to preserve their traditional retirement funds.
For more information on the reverse mortgage product and its recent changes, please purchase Understanding Reverse – 2016. For updates on the newest round of changes, stay tuned by subscribing to this blog.