This week’s Aging at Altitude Conference in Boulder organized by the Daily Camera was an amazing event! The parking lot at the new Boulder Jewish Community Center was packed, and there was even overflow parking at adjacent facilities. The huge attendance was evidence of our large baby boomer and senior population seeking out resources and information. One of the sessions at the conference was about using reverse mortgages as a financial tool for those age 62 and over. I spoke on the panel with two reverse mortgage specialists. We dispelled many of the myths that have been keeping seniors from using this valuable tool. Here is a synopsis of what we shared.
In 1988, Federal Housing Administration (FHA) reverse mortgage insurance legislation was signed by President Reagan. Although reverse mortgages have been around for some time, they are gaining popularity now as baby boomers grow older and have a high demand for cash to maintain their standard of living. In the past, some considered a reverse mortgage as a mortgage of last resort. Over time, the reverse mortgage product has evolved into a financial tool that has helped many people. If you are over 62 years of age, you could be a candidate for a reverse mortgage. The home must be your personal residence and must meet HUD’s guidelines. The reverse mortgage process is fairly complicated and in fact, it is required for the borrower to take a class so that they have a complete understanding of the process.
A reverse mortgage can be secured by your present home, but it can even be used for the purchase of a different home. A reverse mortgage might help you stay in your home longer, or you could sell your larger home and downsize using a reverse mortgage to buy your next home.
Many seniors are dependent on social security but are finding that it is not enough to cover their expenses. A reverse mortgage can be a useful tool to supplement social security by providing additional income. This loan is designed for seniors that need to eliminate a mortgage payment and need a source of income while staying in their present home. The potential loan amount is determined using a percentage of the home’s value. The percentage varies based on the age of the youngest homeowner. The homeowner still owns the home and can sell it anytime they choose.
Typically, the homeowner will never pay off the loan. Rather, the estate of the homeowner will do that. If there is any remaining equity after death, the equity passes to the estate. If the home eventually sells for less than the balance of the reverse mortgage, the estate is not liable for that shortfall.
To get a reverse mortgage, your house does not have to be free and clear, but there does need to be enough equity to pay off the existing mortgage and still have enough to draw upon. The loan amount available is determined by the age of the homeowners, current interest rates, and the appraised value of the home. The maximum loan amount will be subject to FHA loan limits.
There are several reverse mortgage calculators on the internet. However, a full-time Certified Reverse Mortgage Professional (CRMP) should be consulted for calculations based on current formulas.
Reverse mortgages can certainly help low-income families, but the reverse mortgage has become an important part of overall financial plans for many families.
Generally, the amount of equity in the home determines qualification, which is why it can be a great help to low-income seniors. There is no employment requirement in order to qualify for a reverse mortgage, however, the homeowner needs to demonstrate the ability to pay HOA fees, taxes and insurance on the property, or set up a reserve to ensure that those expenses will be paid. The amount of reserve is based on a life expectancy formula.
Ideas for using a reverse mortgage:
- Provides income when the client is down to their home equity as their last source of retirement income.
- Provides income while a retirement portfolio continues to grow.
- Supplements income from an underperforming retirement portfolio.
- Supplements income while waiting longer to receive Social Security benefits.
- Can help with the purchase of a downsized retirement home and have no payments. The proceeds of the reverse mortgage can be distributed in lump sum, equal monthly payments, or as a line of credit with a variable interest rate.
- Proceeds from a lump sum disbursement (secured by the personal residence) can be used to purchase an investment property.
- If a qualifying homeowner chooses, the homeowner can use a reverse mortgage to buy a duplex, triplex or a 4-unit. The homeowner needs to live in one of the units as their personal residence, then the owner can rent out the units they don’t live in for income.
Benefits of a reverse mortgage:
- Loan proceeds are not considered income and are not taxable. Could make the difference as to whether or not a senior can stay in their home by enabling the senior to receive monthly income rather than make payments.
- The payments made to the senior are not taxable.
- If there is an existing loan, it can be paid off from the initial proceeds of the reverse mortgage.
- The formula for the reverse mortgage prevents the mortgage from exceeding the value of the home. When the senior passes away, the estate inherits the home and any equity after the reverse mortgage is paid off.
- There are no restrictions on what the proceeds of the reverse mortgage can be used for.
- A reverse mortgage is a non-recourse loan.
Disadvantages of a reverse mortgage:
- The costs of getting a reverse mortgage are usually higher than a normal mortgage. There is a requirement for mortgage insurance, which adds to the upfront costs.
- Government assistance programs, such as Medicaid or Supplemental Security Income, might be affected if too much is withdrawn in one month. The local administrator for these programs should be contacted for individual details.
- Reverse mortgages are complex and the senior should get tax and legal advice if not fully understood. It is a good idea to use a loan officer who is local and specializes in reverse mortgages.
- The reverse mortgage is a negative amortizing loan, which means the balance increases over time.
Contact a loan officer who is a Certified Reverse Mortgage Professional (CRMP) to see if it would work for you.
About Duane Duggan: Duane Duggan has been a Realtor® for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: the Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, REALTOR® for Life. Also see his video podcasts about real estate topics on RE/MAX of Boulder’s YouTube channel.
For questions, email Duane at DuaneDuggan@BoulderCo.com or call 303-441-5611