Part 2: Reverse Mortgage or the Home Equity Conversion Mortgage (HECM)

Colorado is the third-fastest growing state with a population aged 65+ in the country and Boulder County is also rapidly aging. Reverse mortgages are becoming more popular as Baby Boomers retire and want to maintain their standard of living. The reverse mortgage is a financial tool that has helped many over 62 years old. In my previous article I introduced how to qualify for a reverse mortgage. In this article, I will discuss in more detail the benefits and disadvantages of a reverse mortgage. 

Ideas for using a reverse mortgage:

•  Provides income when the client is down to their home equity as their last source of retirement income.
•  Provides income while a retirement portfolio continues to grow.
•  Supplements income from an underperforming retirement portfolio.
•  Supplements income while waiting longer to receive Social Security benefits.
•  Can help with the purchase of a downsized retirement home and have no payments. The proceeds of the reverse mortgage can be distributed in lump sum, equal monthly payments, or as a line of credit with a variable interest rate.
•  Proceeds from a lump sum disbursement (secured by the personal residence) can be used to purchase an investment property.

Benefits of a reverse mortgage:

• Loan proceeds are not considered income and are not taxable. Could make the difference as to whether or not a senior can stay in their home by enabling the senior to receive monthly income rather than make payments.

• The payments made to the senior are not taxable.

• If there is an existing loan, it can be paid off from the initial proceeds of the reverse mortgage.

• The formula for the reverse mortgage prevents the mortgage from exceeding the value of the home. When the senior passes away, the estate inherits the home and any equity after the reverse mortgage is paid off.

•  There are no restrictions on what the proceeds of the reverse mortgage can be used for.

•  A reverse mortgage is a non-recourse loan.

Disadvantages of a reverse mortgage:

• The costs of getting a reverse mortgage are usually higher than a normal mortgage. There is a requirement for mortgage insurance, which adds to the upfront costs.
• Government assistance programs, such as Medicaid or Supplemental Security Income, might be affected if too much is withdrawn in one month. The local administrator for these programs should be contacted for individual details.

• Reverse mortgages are complex and the senior should get tax and legal advice if not fully understood. It is a good idea to use a loan officer who is local and specializes in reverse mortgages.

• The reverse mortgage is a negative amortizing loan, which means the balance increases over time.

Contact a loan officer who is a Certified Reverse Mortgage Professional (CRMP) to see if it would work for you.

To learn more, see my podcast video with Premier Lending’s Jessica Shanahan, mortgage loan officer, who explains reverse mortgages at: http://bit.ly/2Gpqq9d

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