Reverse mortgage as a retirement income option

Doug Horn

You cannot go a day without seeing Robert Wagner, Fred Thompson, or some other spokesperson giving their pitch on reverse mortgages. By the way this product is presented, homeowners could draw the conclusion it is the greatest thing since sliced bread.

The following is a brief recap of the rules identifying those who could qualify for a reverse mortgage. All of the owners of the home must be age 62 or older. There can be an existing mortgage, but the new eligible reverse mortgage amount must be larger so the existing mortgage can be paid off. The home must be the primary residence, and the borrower cannot currently be delinquent on any Federal debt. The residence must also meet the guidelines as an approved structure, but most single family homes as well as newer manufactured homes as long as the lot is owned should meet the requirements.

The primary purpose of a reverse mortgage is to provide a source of income for the retiree. This income can be provided as a lump sum, a monthly stream or drawn as needed perhaps to meet quarterly or annual expenses. For retirees whose living expenses now exceed their current income and there are no investments or savings to draw upon, a reverse mortgage should be considered.

However, prior to moving forward, one of the requirements is the home continues to be the primary residence. Many retirees often elect to downsize their home in order to reduce the work load required to maintain the property, potentially lower monthly or annual costs, or to relocate to be closer to one or more of their children. Thus, moving should take place prior to taking a reverse mortgage since the mortgage would be required to be paid once the home is sold. Since the fees can be far in excess of those of a traditional mortgage, it would be best that the retiree plan on staying on the property for many years to maximize the benefit of the setup costs. Additionally, the Internal Revenue Service no longer taxes the gain when the primary residence is sold, as long as the gain is less than $250,000 for singles or $500,000 for couples. Thus, by selling a larger home and downsizing, part of the existing equity may be invested and used to meet the income deficiency. This may delay the need to establish a reverse mortgage for several years.

Once no other options are available, the reverse mortgage can be a lifeline to many seniors. Though, as mentioned earlier, the fees to establish a reverse mortgage can be significant. There are a number of fees that can be charged, so comparing providers is a good idea and way to save. These fees include an origination fee from $2,500 to a maximum of $6,000; generally two percent of the loan amount. Since a reverse mortgage does not have to be paid back as long as the home is the primary residence, there are insurance premiums associated with this guarantee. The premiums can be two percent of the value of the property with an additional monthly premium of another one half percent of the loan value. Then there are the standard closing fees which will include attorney fees, title searches, appraisals, recording fees, and so forth. Lastly, a monthly service fee may be incurred. This should be no more than $35 per month. All of these fees are in addition to the interest that is charged and accumulates on the loan.

Due to the costs and insurance on the reverse mortgage, the amount of the mortgage is based upon the value of the home and age of the owners. When monthly income is taken, it will be paid for as long as the owner is the resident of the home. Thus, it is the objective of the lender that the total setup fees charged, distributions paid to the owner while living in the home and accumulated fees and interest do not exceed the value of the home. When the loan comes due, in the event the loan exceeds the value of the home, the homeowner is not responsible for the excess. Thus younger retirees may receive lower monthly income amounts due to the potential long payout periods when compared to other retirees with similar home values who are ten or fifteen years older.

One last consideration should be made prior to completing a reverse mortgage. Once the monthly income amount from the reverse mortgage is known, it may be worth considering whether the children of the retiree can provide a similar amount. If so, the fees and accumulating interest could be avoided.

Reverse mortgages are a lifeline to many seniors, but they are not without disadvantages. Compare providers and consider all other options prior to signing on the dotted line.

For assistance with insurance, estate planning, and managing investments, contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.

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