Use Your Home as Disposable Retirement Income

Many retirees have found that with inflation and rising health care costs, their planned income for retirement is not meeting their needs.  Some have turned to reverse mortgages to supplement their retirement income.

What is a Reverse Mortgage?

A reverse mortgage is a loan taken out on a home that allows the homeowner and spouse to remain in the home until both either move or pass away.  Reverse mortgage proceeds can be received in three different ways:

  • As a single lump sum
  • As regular monthly income
  • At times and amounts determined by the homeowner

Reverse mortgages are fairly flexible in equity distribution.  But, it should be noted that, as with any type of home loan, there are certain fees, closing costs, and expenses that accompany a reverse mortgage.  Therefore, if a person knows s that they will be leaving the home in the near future, it may be advisable to find other ways to fill in their particular income gaps.  

Different Types of Reverse Mortgages

However, if a person decides that a reverse mortgage is just right for their particular situation, they must decide what type of reverse mortgage they will obtain:  a public-sector mortgage or private sector mortgage.  Since each of these types of reverse mortgages have different rules and requirements, it is important to understand the differences.

Public Sector Reverse Mortgages

There are two different types of public sector reverse mortgages:

  • Deferred Payment Loans (DPLs) provide a single lump sum payment used to repair or improve a home.  DPLs are available through local and state government agencies.
  • Property Tax Deferral Loans (PTD provide a yearly loan advance that is used to pay property taxes.

Private Sector Reverse Mortgages

There are also two different types of private sector reverse mortgages:

  • Home Equity Conversion Mortgages (HEMs) are federally insured loans backed by the federal government and offered by a lender who is approved by the Federal Housing Administration.  
  • Proprietary Reverse Mortgages are available through private companies that allow the lender ownership rights to the loan.  

Private sector reverse mortgages can be used any way that the borrower sees fit and do not fall under federal and state rules.

Advantages and Requirements of Home Equity Conversion Mortgages

The advantages of an HECM include:

  • Proceeds can be used for any purpose
  • Provide considerable flexibility in how the funds can be paid to a borrower
  • Are widely available
  • In most situations, are the least expensive reverse mortgage that can be used for any reason.

The requirements of an HECM include:

  • The borrowing spouse must be at least 62 years of age.
  • A non-borrowing spouse does not have to meet the age requirement.
  • The home that the reverse mortgage is on must be occupied as the principal residence.
  • The borrower must own the property outright or have paid down a considerable amount of the mortgage.
  • The home must be a single-family residence.
  • A single-family residence is defined as a unit occupied by the borrower in a one-to-four-unit building, an FHA approved condominium, a unit in a planned development, or a manufactured home that meets FHA requirements.
  • Cooperatives and most mobile homes are not eligible for a reverse mortgage.
  • The borrower must not be delinquent on any federal debt.
  • The borrower must have the financial resources to continue to pay for property taxes, insurance, and any homeowner association fees.
  • Income, assets, monthly living expenses, and credit history will be verified, along with timely payment of real estate taxes, hazard and flood insurance premiums.
  • The home and property must meet FHA minimum property standards.
  • The proceeds can be used for required repairs.
  • The homeowner must receive free HUD approved reverse mortgage counseling

The payment options of an HECM include:

  • Single lump sum payment – as the name implies, a single payment is made to the borrower.
  • Line of credit – withdrawals are made at different times and in different amounts, there is a maximum amount that may be drawn out.
  • Tenure plan – Equal monthly payments are received for as long as a person lives and continue to occupy the home as a principal residence.
  • Term plan – equal monthly payments are received for a fixed number of months.  This type of payment options will provide more money that a tenure plan, but the monthly checks will end at the end of the term.
  • Modified tenure plan – this plan combines the tenure plan with a line of credit.
  • Modified term plan – this plan combines the term plan with a line of credit.

HECM Loan Repayment and Cost Considerations

Since the HECM loan must be repaid at the time the last surviving borrower or non-borrowing spouse leaves the home, either due to death or sale of the home, the loan becomes due.    In addition to repayment of the HECM loan, the overall value of the estate will be reduced, leaving less for heirs and loved ones after death.

In addition to repayment considerations, there are several costs associated with HECM loans.  When obtaining the loan, these costs may be financed into the loan.  It should be noted that this option will reduce the amount received.  Some costs incurred during the loan process include:

  • Origination fee
  • Closing costs
  • Mortgage insurance premium (MIP)
  • Interest rate
  • Servicing fee

As with any complex financial decision, a qualified financial planner should be part of the planning process.  With knowledge of most reverse mortgage plans and requirements, a qualified financial planner can help most retirees with the confusing and often costly process of obtaining a reverse mortgage.

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