|
|
MAKING CENTS OUT OF THE NEWS
Blog #34
(October 20th, 2011)
A Reverse Mortgage - Me?
By Tom McAllister, CFP®
As co-founder of the local Financial Planning Association chapter, I try to attend our quarterly meetings whenever I am in town. At one recent meeting I was made aware of dramatic improvements in a certain financial product which I have never used with clients - reverse mortgages.
Although reverse mortgages have been around 22 years, I had not paid them a great deal of attention. I assumed these financial tools were used by seniors who need additional monthly income to meet expenses. Since most of my clients do not fall into that category, I tended to ignore the product.
I now learn that improvements made recently by MetLife Bank, N.A. (owned by Metropolitan Life Insurance Company) to reverse mortgages now allow people of substantial means to utilize them effectively. Since my readers are unlikely to learn of these improvements elsewhere, I decided to devote this week’s blog to reverse mortgages.
Officially, reverse mortgages are called Home Equity Conversion Mortgages (HECMs). Available in all states except Alaska, South Dakota, and Texas, HECMs are insured by the Federal Housing Administration. Currently available in amounts up to $625,000, HECM borrowings are free of income tax.
The Federal government has imposed on reverse mortgages in order to protect the elderly from abuse. The homes involved must be owner-occupied as the primary residence and cannot be foreclosed on while the homeowner named on the deed is alive. Citizens aged 62 and older are eligible.
HECMs are available both at fixed rates and adjustable rates. With fixed rates constant for the life of the loan, fixed-rate reverse mortgages are usually taken as a full draw for those paying off a large first mortgage. Adjustable rate reverse mortgages are adjusted monthly or quarterly, and these are often used by borrowers who require a line of credit. This is where many readers might benefit.
By Federal regulation, all borrowers must receive independent counseling from one of a list of Housing and Urban Development-approved counseling agencies. There are no income or credit score qualifications, and the first lien loans are non-recourse, with only the home itself as collateral. HECM’s, as I said, are not subject to foreclosure until the death of the home owner.
The options available to the borrower include
 Tenure (equal monthly payments as long as at least one borrower lives and
continues to occupy the home as their primary residence)
Term (a fixed number of monthly payments)
Credit option (allows for unscheduled payments or installments at times
and in amounts desired by the borrower until the line of credit is exhausted
This third option is what made my ears perk up! Throughout my thirty six years as a financial planner I, along with nearly all my colleagues, have advised clients to keep an “emergency reserve” in cash or cash equivalents. For most people during their earning years I suggested a minimum savings of six months’ living expenses. Depending on circumstances, after retirement this number could be as high as 24 months, minus social security and other fixed pension income. With today’s miniscule short term interest rates, this can mean tying up a very substantial sum while earning virtually nothing!
A standby line of credit at a fixed rate against one’s primary residence could free up most of these reserves, allowing them to be invested in dividend paying stocks, high yield preferred stocks (up to 7% in the market today), or master limited partnerships paying very high yields. Should an emergency occur, with the market off, the line of credit could be drawn down, allowing the borrower to utilize these funds until such time as his investments recover, even if that took months or years.
By the same token, the line of credit could be a substitute for a long term care insurance policy, the premiums of which become quite high as we get older. (I have had one for nearly 20 years, so my level premiums are still affordable, but, for someone in their late 60’s or 70’s the necessary premiums might be just too expensive.) A standby line of credit may be the answer, allowing a draw-down of an amount monthly sufficient to make up the difference between current income and the amount needed for nursing home care.
How do reverse mortgages work? The mortgages are insured (at borrower’s expense) against “cross-over” risk, in case the loan balance exceeds the value of the property. These premium rates are set by HUD, and are quite reasonable.
Upfront costs (appraisals, insurance, lender fees, etc.) on these loans are surprisingly inexpensive, but vary with the type and term of the loan desired and other circumstances. As a rule, a standby line of credit is very affordable.
Some final notes about reverse mortgages:
Most government benefits, such as Social Security and Medicare will NOT
be affected, but Medicaid and Social Security Disability may be impacted.
Borrowers should always consult their own advisors on these matters.
There are NO required monthly payments for principal and interest charged.
These sums are accrued on the portion of the loan which has been disbursed.
MetLife Bank has set up a nationwide network of mortgage brokers (of which
I am NOT one) to help borrowers with their particular situations.
Call 317-571-1112 for more details.
|
| |
| |
Click To Print This BLOG
