May 2014 Shouldn’t You Go Forward With a Reverse Mortgage?

reversemortgagesAs we age, our financial resources and priorities begin to shift; we may no 
longer be receiving a bi-weekly paycheck, but we also may no longer have 
dependent children. However, a lot of stress can result from living on a limited 
income in the shadow of increased costs associated with healthcare and estate planning.

There are a number of financial tools and arrangements that can help you finance 
your retirement years, including pensions, 401(k)s, and various trusts and insurance 
programs. Another option exists that is not as widely known-reverse mortgages. This 
option may be right for you if you own the home you live in and are looking for some 
extra cash.

A reverse mortgage lets you borrow against the equity in your home without having 
to repay the loan while you still live in the house. You can get the money in a lump 
sum, in monthly cash payments for life, or by drawing on a line of credit, or you can 
choose a combination of these options. The amount you can borrow and the sizes of the loan installments are based on several factors, including: your age, the value of the 
home and of your equity in it, the interest rate, and the kind of loan you select. Reverse 
mortgages can be costly, but the relative costs lessen over time, and you will never owe 
more than the value of your home.

Most reverse mortgages place no restrictions on how you use the money. The loan usually does not have to be repaid until you sell your home, move, or die. In 
years past, there were loans that had to be repaid at the end of a specified number of years. Very few, if any, of these types of loans still exist. Some lenders combine a 
reverse mortgage with an annuity that allows you to receive payments under the 
annuity even after you sell your home and move. However, there can be complicated 
tax implications resulting from such an annuity; make sure you understand how an 
annuity would impact your tax obligations and estate planning before agreeing to such 
an arrangement.

If you enter into a reverse mortgage, you will be required to repay the money you 
have borrowed plus the accrued interest and fees when you sell your home or move, or at the end of the term. The house can be sold to repay the loan, or the funds can be 
collected some other way (for example, out of your savings). The lender is not permitted 
to collect more than the appraised value of the home at the time the loan is repaid, even 
if the loan exceeds that amount. Therefore, you will never end up owing more than the 
current value of the home, which can provide some important peace of mind.

You will never end up owing 
more than the current value of 
the home, which can provide 
some important peace of mind.

The most widely available reverse-mortgage 
product is the federally insured Home Equity 
Conversion Mortgage (HECM). Under this 
program, the Federal Housing Authority (FHA) 
provides insurance for reverse mortgages 
acquired through private financial institutions. 
Another reverse-mortgage program is the 
Home Keeper Mortgage, which is backed by 
Fannie Mae. Over the years, a few private 
companies have started to offer their own 
reverse-mortgage products. These tend to be more costly than the HECM or the Home 
Equity Keeper Mortgage because the lender 
must charge customers more in order to self- 
insure against potential losses. Federal law 
requires all reverse-mortgage lenders to inform you, before making the loan, of the total amount 
you will owe throughout the course of the loan. This allows you to compare the costs of 
different mortgages.

Your eligibility for a reverse mortgage 
depends on the specific loan you apply for, but 
most programs have rules similar to those of 
the HECM program. Generally, you and anyone 
who is listed on the deed must:

Be at least 62 years old; andOwn the property free and clear, except 
for liens or mortgages that can be paid off 
with proceeds from the loan.In addition, the property must be:The borrower’s primary residence (so, a 
vacation home won’t work); andA single-family home or in a one- to four- 
unit building. (Some condominiums are 
eligible depending on the program.)

If you are considering a reverse mortgage, it is important to think through how it might 
impact your estate planning. Reverse mortgages 
allow you to spend your home equity while you are alive. This can be a useful way to get 
more cash to spend now; however, it may also 
result in your using up all of your equity and 
not having any left to pass along to your heirs. 
It is important to talk to the attorney who 
helped you craft your estate plan to determine 
if a certain reverse mortgage option is best for 
your needs. There can also be complicated tax 
implications connected with certain reverse 
mortgage options that your lawyer or tax 
advisor can help you understand.