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Fast Forward Your Finances with a Reverse Mortgage
Is A Home Equity Conversion Mortgage Right for You?
By: Anthony Tomaro
Investment Advisory Representative
Tomaro Financial Group
Numerous individuals, 62 years of age or older, are surprised to find themselves living in the same residence they’ve owned for years. Instead of moving to a retirement community, they remain in their primary residence longer than they ever imagined, possibly because of the memories built, the comfort of being home or concerns about moving away from family and friends. At the same time, an individual’s financial needs often change for older adults because of a shift in employment, annual income and/or cost of living.
Defining a Reverse Mortgage
Property owners discovering they need additional cash flow may want to consider a reverse mortgage. Also known as a home equity conversion mortgage (HECM), this important financial tool is backed by The Federal Housing Administration (FHA), allowing borrowers to convert the equity in their home into a monthly stream of income, or a line-of-credit. Essentially, the homeowner earns added income through a reverse mortgage loan.
Obtaining a reverse mortgage should only be done with great care and research. Only a small fraction of people age 62 and older should consider a reverse mortgage as part of their overall financial plan.
Property owners who have accrued substantial value in their homes can use a certain percentage of it to finance the loan. A financial planner will consider all the options available to a client and present different scenarios that can transpire in the future potentially impacting their ability to pay property taxes and homeowner’s insurance. If a lender determines the borrower may not be able to meet their financial obligations, they will be authorized to earmark a certain amount of funds from the loan to pay future charges.
Unlike other loans, HECM’s do not have to be repaid until the borrower no longer uses the home as a primary residence or is unable to meet the terms and conditions of the mortgage. Interestingly enough, a reverse mortgage allows a homeowner to buy a primary residence if the borrower has excess cash to pay the difference between the sales price and the HECM proceeds and all closing costs associated with the property sale.
Criteria for Eligibility
Loan eligibility requirements for HECM’s are age – the individual must be 62 or older, and the borrower must own and live in a single family residence or a two-to-four-unit home. No monthly principal and interest payments are required since the equity is given to the borrower. However, individuals need to pay real estate taxes, utilities, and hazard/flood insurance premiums. When the borrower sells the house, or no longer uses it as a primary residence, the cash, interest and other HECM finance charges must be repaid. The remaining equity belongs to the spouse or estate – meaning the proceeds left can be transferred to heirs. After the loan and associated fees are repaid, no debt is ever passed along to the estate or heirs.
When You Should Select a Reverse Mortgage
According to Tomaro Financial Group, the following are examples of when not to select a Reverse Mortgage:
- If a homeowner is struggling to pay their mortgage, downsizing may be a better option rather than entering into a reverse mortgage to improve a financial situation.
- If there is a chance of someone relocating, a reverse mortgage is not always the best choice.
In the event someone enters into a reverse mortgage, it is probably best not to exhaust the total loan amount available. A certain portion should be earmarked for unexpected home, car and or medical bills. Having a lifeline in an emergency builds the foundation for security.
The amount of money you can earn from the equity in your home depends on:
- The age of the youngest borrower or eligible non-borrowing spouse
- Current interest rates
- The lesser of appraised value of the home
- The HECM FHA mortgage limit of $625,000
- Sales price of the residence
These life scenarios illustrate when selecting a reverse mortgage is advisable:
- A married couple age 70 and 72. They have 12 years remaining on the mortgage with a monthly payment of $1,200 a month. The loan amount is $120,000 and the house is worth $300,000. The couple, fond of the residency, desires to live out their remaining years in the house. Between their social security checks, pension and interest off of investments they have to live frugally and do not do the things they wish they could in retirement. In this situation, the couple could take out a reverse mortgage and remove from their budget line having to pay $1,200 a month for the mortgage. Additionally, they have access to a line of credit allowing them to pay for any unexpected expenses.
- A married couple with no children decides they want to retire and purchase their dream home to live in for the rest of their life. Their current home’s value is $300,000 and the mortgage is paid off. The home they are looking to purchase is one block away from the ocean and is $500,000. It is their dream house and location, but they do not want a costly mortgage. In this situation, the couple could use a large portion of the home sale proceeds to purchase a home with a reverse mortgage. The benefit is they would never have to worry about making a mortgage payment, own their dream home and have plenty of money to live a comfortable retirement between their savings, social security and pensions. They plan on leaving their assets to a few close friends and relatives, since they have no heirs of which to worry having to pass debt along.
There are high-fees associated with a reverse mortgage, but in certain circumstances those fees are worth the cost because it allows people to stay in their homes, provides better financial freedom, and does not leave a burden to borrowers’ heirs.
People should utilize a reverse mortgage as part of an overall financial plan and not rush into one because of a pending financial crisis or because they are being pressured into this type of loan. They are a valuable financial tool if used and executed the correct way.
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