Reverse Mortgages - What You Need to Know

Reverse MortgageOver the past few years we've seen a surge in reverse mortgage advertising, with celebrities such as Fred Thompson and The Fonz (Henry Winkler) touting the benefits of these financial instruments as a way to solve the income problem of retirees.

How They Work

A reverse mortgage is a tool that allows a homeowner to withdraw equity from his/her home, but it does not involve a sale of the home, thus, ownership does not change. As much as 95% of all reverse mortgages are written through a Home Equity Conversion Mortgage (HECM), regulated by the federal Department of Housing and Urban Development (HUD) and are available only through an approved Federal Housing Administration (FHA) lender.

To qualify for a HECM reverse mortgage, the following criteria must be met: 

  1. The homeowner must be at least age 62. If the property is owned jointly, the youngest titleholder must be at least 62.
  2. The property must be a single family dwelling, an approved FHA condo, or a multiple family home which contains at least two but not more than four units.
  3. The home must be the primary residence of, and occupied by, the homeowner.
  4. If the home has an outstanding mortgage, the equity in the home must be sufficient to pay off all mortgages, liens or legal obligations against the property. 

 

To satisfy the residence rule, the homeowner must reside in the home for at least 183 days per year and confirm this by signing an Annual Occupancy Certificate. If this is a problem due to the homeowner’s health or work situation, the homeowner must notify his Servicer. If the homeowner is out of the home for 12 consecutive months, the loan could be in default.

If the homeowner rented the property, it would no longer be considered his primary residence, and the loan would be in default. Also, the homeowner must continue to pay insurance and property taxes and maintain the property in accordance with FHA requirements. 

The Proceeds

Money received from a reverse mortgage is considered to be a loan, and as such, is not subject to income tax. In addition, the maximum amount a homeowner may receive from a HECM reverse mortgage is based primarily on the: 

  1. appraised value of the home
  2. age of the individual (or couple)
  3. prevailing interest rates
  4. government-imposed lending limits.

 

The funds can also be structured in a variety of ways, including:

  1. a lump sum. However, 60% of the homeowner's equity is the most money a borrower can receive in the first 12 months after closing.
  2. a monthly payment
  3. a line of credit
  4. some combination of each.

 

The income may be paid out over the lifetime of the homeowner (and spouse, if the home is owned jointly) or for a specified number of years. 

What Ifs?

What happens if the homeowner dies? What if the homeowner is placed in a nursing home or assisted living facility? One of the requirements of a reverse mortgage is that the homeowner continues to reside in the property. While interest is charged on the loan, no repayments are due until the client dies or moves out of the home. If the house is sold, the proceeds must be used to pay off the reverse mortgage.

Under the criteria listed above, the homeowner would thus fail to meet these criteria and the loan would need to be repaid. If the homeowner didn't have the financial resources to repay the loan, the home would have to be sold. After the home was sold, any surplus which remains after repaying the loan would accrue to the homeowner or to his estate.

However, what if there wasn't enough equity to repay the loan when it was sold? The lender would request reimbursement from the FHA. In short, other than the home itself, no other assets would be attached to the agreement. 

The Bottom Line

Reverse mortgages are fairly complex and as such, require due consideration and proper guidance. Some resources are available such as the website of the National Reverse Mortgage Lenders Association (NRMLA) https://www.nrmlaonline.org/default.aspx. This Washington, D.C.-based organization exists to educate consumers and train lenders on the pros and cons of reverse mortgages. Additional information on reverse mortgages can be found at  www.reversemortgages.com

Although, this may be a good idea for some clients, there are many issues to consider prior to entering into a reverse mortgage agreement. Prudence dictates that one learn as much as one can, and it's best not to wait until one runs out of money before implementing this strategy.

Who's Interested in Reverse Mortgages?

Reverse mortgages have primarily been used by retirees in their 70s who urgently needed cash to pay bills and stay in their homes. The loan was seen as an emergency measure, rather than as part of a strategic retirement income plan.

What Disadvantages Do You Need to Know?

A reverse mortgage probably is not a good option if one is planning to move out of his/her home. Because interest accumulates on the loan during the loan period, and any proceeds from the sale of the house have to be used to repay the reverse mortgage, there may be little or no money left after a sale. Further, the reverse mortgage might be inappropriate if one is concerned about the estate that if left to his/her heirs. 

In addition, you are liable for any closing costs associated with the loan, which can be as high as $2,000 to $3,000, and remain liable for property taxes and mortgage insurance.

Conclusion

In an age when individuals are in need of options, the reverse mortgage may provide the solution to many liquidity problems. However, it is my opinion that a reverse mortgage should be one of the last options to consider, due to their complexity.

Current News            

Current NewsTwo recent economic reports and one survey provided some positive validation for the stock market's strength. First, the May survey of credit managers showed a continued improvement in credit conditions around the nation, which bodes well for future economic growth. Second, the Mid-American Business Conditions Index rose to its highest level in three years.

In relation to the stock market, it is hard to believe that in October of 2007 the Dow Jones Industrials and S&P 500 were trading at 14,165 and 1,565 respectively. That being said, as of the close of market yesterday, (excluding dividends) the DJIA  and S&P 500 are up 18.08% and 22.97%, respectively from their prior record highs. The stock market has rebounded quite modestly when compared to record highs 6 1/2 years ago and does not look excessive.

Another item of note, according to a survey by A.T. Kearney, a Chicago-based management-consulting firm, the U.S. ranked first in the firm's annual survey of senior executives regarding the likelihood of investing in it.

Senior executives at 300 companies scattered around the world participated in the survey, and the companies all have revenue of more than $1 billion. In addition, the U.S. topped the survey for the first time in four years.

Bottom line, these reports should provide some relief for some investors who have market jitters.

TD Ameritrade New Look and Features

If you utilize the TD Ameritrade client access portal, AdvisorClient.com, please note that they will be introducing a new look and feel along with features to enhance your online experience.  The following is a brief overview of the upcoming enhancements:

  • New Login Screen Design - While the login screen will have a new look and feel, you will continue to use your existing login credentials (user ID and password) to access the website.

  • Enhanced Security - When logging in, on or after June 6, you will be asked to establish security questions.  Once created, the security questions will be presented when an extra check of your identity is warranted, thus creating an additional layer of security for your account.  Please establish your security questions at your earliest convenience to ensure increased account protection.

  • Password Reset - A convenient and secure method for resetting passwords will be added.  To reset a password, you must provide your user ID and the zip code of the mailing address they have on file.  Once that information is verified, they will provide a security code required to update the password via email or telephone.  On-screen prompts will direct you to select your preferred option for receiving the security code.

It's important that you are running the latest version of your internet browser in order to take full advantage of the enhanced security features and to ensure general compatibility with the website.

If you have any questions regarding these updates and changes, please contact our office.

IAG Shredding Event Outcome

Last Saturday's paper shredding event was a success! The weather was great, and we were able to spend time with clients and friends of the firm, while getting rid of 95 boxes of documents. We hope everyone had a good time and left relieved knowing you got rid of a lot of old paperwork, without worrying about what may happen to it.

Quotes

"An ethical decision is a tough one with the payout at the end. An unethical decision is an easy one with the payout up front."

                   Frank Bucaro

"We crucify ourselves between two thieves: regret for yesterday and fear of tomorrow."

                   Fulton Oursler

"If you're not helping someone, you're just taking up space."

                   Billie Alice Bowman

 Tony Moeller, CPA

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on. Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

 

 

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