Utilizing a Reverse Mortgage
A reverse mortgage is a home-secured loan on the primary residence for homeowners over the age of 62, also known as a Home Equity Conversion Mortgage (HECM). It allows borrowers to loan against some of the equity in their home for future funds or a line of credit. There are several options to choose from that differ on interest rate, how much money is available, and payment options.
Unlike a conventional mortgage or home equity line of credit (HELOC), there are no monthly payments due as long as one of the borrowers continues to own and live in the home as their primary residence. The reverse mortgage principal and interest will not be due until a “maturity event”, like sale of the home or death, occurs. There are fees associated with initiating a HECM, however. The borrower must be current on property-related taxes, insurances and upkeep costs to remain in good standing of the loan, or risk having the line of credit dissolved and balance come due.
There are three different ways to receive funds (combination of options may be available):
- Lump sum
- Stream of income (can be a fixed time period or indefinitely while you live in the home).
- Line of credit (access the funds when needed)
Choosing a line of credit extends further options:
- With a reverse mortgage line of credit, the unused amount will grow over time, unlike a traditional HELOC. This means the less you take up front and the longer you wait, the more will be available later. The growth rate is usually tied with current interest rates.
- This line of credit cannot be reduced or “frozen” as long as you stay current on taxes, insurance and upkeep. So you can apply at age 62 and delay drawing from the line of credit until you actually need it.
- The line of credit also has a non-recourse feature. This guarantees that you will never owe more than your house is worth. The loan is insured by the Federal Housing Administration so even if the house cannot be sold for more the value of the loan, debtors will not seek additional money from you or from your heirs.
You can address short and long term obligations by utilizing the funds available through a reverse mortgage line of credit. One example of its usefulness is long term care protection. A borrower has the ability to fund long term care expenses through monthly withdrawals from a line of credit (as long as one borrower stays in the home). This is a good alternative if long term care insurance is not available to you. The HECM is can be a tax free source of withdrawal if you are relying on IRA withdrawals and do not want to increase your taxable income to cover an unexpected expense. You will want to consult with a tax advisor for specific information regarding the effect this may have on your tax requirements.
A reverse mortgage is an often considered a “last resort” option to cover a retirement deficit. However, there are many benefits to pursuing a reverse mortgage whether you decide to access the funds or not. It is important to decide if you want your home to pass to heirs when considering a reverse mortgage, because the balance will come due at the death of both homeowners, and will have to be paid off in full before the homeownership will be transferred. Remember reverse mortgages are not beneficial in all situations and the requirements of the loan may hinder estate planning goals. You will want to weigh the benefits and restrictions carefully before moving forward. If you would like to discuss the reverse mortgage line of credit in more detail, please reach out your Relationship Manager.
More information can be found on https://www.reversefunding.com/faqs
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