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The New Math of Reverse Mortgages for Retirees

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Reverse mortgages, which have been malicious for years as a last resort loan for the struggling elderly, have transformed.

For decades, the image of the industry has been tainted by horror stories about borrowers facing foreclosures and surviving spouses who have been expelled. But today, these products were first introduced in 1961 and have evolved into tools that work as originally intended by federal insurance and surveillance. This reduces the financial burden on retired homeowners who have limited income and want to stay home until they die.

Commonly known as HECM, insured by the Federal Department of Housing Administration and supervised by the Department of Housing and Urban Development, home-backed convertible mortgages provide borrowers with the following protections: Distribution of lump sum payments they cannot afford. Protection from defaults when the value of a home is less than the loan amount. Provisions to ensure that a spouse who survives the death of the borrower has the right to stay at home.

Reverse mortgages are just one of the financing options senior homeowners choose to meet the needs of posterity. In addition, HECM still has some drawbacks, such as high prepaid fees. On the other hand, the burden of paying off the loan is on your heirs, but if they pay off the loan, they have the option of keeping the house.

But for older people who want to run out of savings and stay home until they die, HECM “may be a product to consider,” said Wade Pfau, a professor at American College and founder of RetirementResearcher.com. increase. Independent resource for retirement income planning. “This is a way to free money to pay for long-term care and other unexpected living expenses,” he says.

Dr. Pfau points out another advantage. Unlike other retirement incomes such as IRA and distributions from 401 (k), the funds paid are considered prepayment of the loan and are not taxed.

According to the National Reverse Mortgage Lenders Association, HECM occupies 95% of the US reverse mortgage market. According to the association, there are about 580,000 HECMs today, for a total of about $ 113.5 billion.

However, most US homeowners are still skeptical. According to a 2019 study by the Brookings Institute, less than 2% of homeowners over the age of 62 have all types of reverse mortgages, a professor of personal financial planning at Texas Tech University and Evenksy & Katz /. Principal John R. Salter said. Foldes Financial Wealth Management.

“There are a lot of misunderstandings about them,” he says. “They are complex products.”


To qualify for HECM, the borrower must be 62 years of age or older, own and occupy the property as their primary residence, and pay for property taxes, insurance, homeowner association fees, and other expenses arising from the home. Must have

HECMs are only available from FHA-approved lenders. The borrower must purchase FHA mortgage insurance and attend a briefing session with a HUD-approved counselor.

The amount that can be borrowed, called the “principal limit,” depends on factors such as the valuation of the property up to the FHA loan limit, the unpaid amount, the borrower’s age, and the current interest rate.

If the borrower chooses a floating rate payment plan fixed to the US Constant Maturity Treasury Index, the pristine amount may continue to grow at that variable rate once the payment is made. This option allows you to receive the loan as a credit line and the borrower can use and distribute the loan only when needed. Or as a holding period (provided with monthly payments over the entire duration of the loan); monthly payments for another specified period. Or a combination of these options. (Recipients can choose to change their payment plan to another available option whenever funds are available.)

If the borrower prefers a fixed rate option on the loan instead, this can be beneficial when interest rates are rising and only one-time payment options are available.

In the past, many older people who used bulk reverse mortgages quickly spent money and lacked the funds to pay for insurance, property taxes, and other costs. This usually leads to defaults and evictions if no economical solution is found.

HECM seeks to mitigate this risk by limiting the amount that can be borrowed. (The maximum amount of housing mortgage that can be borrowed has been raised from $ 822,375 in 2021 to $ 970,800 this year.) FHA will also perform a financial valuation of loan applicants to prevent defaults.

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Another safeguard is protection against a decline in the value of your home. “FHA covers the shortfall between the final loan balance and the net income from the sale, so you don’t have to worry about being” underwater “on the loan if the value of your home goes down,” said Professor Salter. say.

“This is because HECM is a non-recourse loan, so homeowners don’t have to repay a balance that exceeds the value of the home,” said Steve Irwin, president of NRMLA. So if a person takes out $ 100,000 HECM and the home price drops to $ 95,000 when the borrower dies, the property can sell the home and use the proceeds to repay the loan balance and the FHA insurance remains. Cover the amount. “

In all reverse mortgages, the borrower does not relinquish ownership or ownership of the property unless he dies, leaves the house, or maintains the obligations of the homeowner. In addition, under HUD’s HECM program, federal guidelines state that under certain conditions, the surviving spouse of the borrower may maintain the home as the primary residence, not move for 12 months, and stay in the home for as long as they stay. It is said that it can be done. I am currently paying taxes and insurance. According to NRMLA, this is as long as you marry the borrower when the reverse mortgage takes place, keep the house as your primary residence, and keep your tax and insurance payments up-to-date, even if your spouse is not the borrower. This is true. ..

Some drawbacks

It is wise to have your financial adviser guide you through the process of determining if a HECM is right for you and, if so, choosing the best payment option. Miscalculating payments can lead to longer lives than revenue.

High prepaid fees can also be a downside (although they can often be incorporated into a loan). These include an origination fee up to $ 6,000. Interest and service fees; HUD counseling fees; appraisal fees and third party closure fees. There is also prepaid mortgage insurance, which is 2% of the valuation of the home paid in the first year and then 0.5% of the mortgage balance charged each year for the entire term of the loan. According to the FHA-approved lender American Advisors Group, if a 65-year-old couple opens a $ 250,000 HECM in a $ 500,000 worth of home, the total initial cost can reach $ 18,000 or more under certain circumstances. ..

“It’s costly, so it’s important to shop and find a quality lender that offers a good price,” says Pfau. HUD list Number of FHA-approved reverse mortgage lenders.There is also a lender locator ReverseMortgage.org..A calculator is provided to help determine the size of the HECM that can be qualified RetirementResearcher.com..

Heirs should also be aware that interest expense on HECMs can accumulate significantly over time. This is especially true if you are in your 60s and want to take out a loan and stay at home for another 20-30 years. In that case, most of the income from the sale of the home could be used to repay the loan. In addition, if you need to sell your home to move to long-term care or livelihood support, you may have very little capital left for that purpose.

The presence of HECMs can also affect the ability to qualify for other government social programs such as Medicaid and supplemental social security income.

Io Anow is a New York writer.She can reach at [email protected]..

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