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By Bob Moeller
WEAC Member Benefits
March 2007
Financial
Planning Seminars
Achieving
Financial Independence
A rapidly growing vehicle for retirees to get some extra cash is the Reverse Mortgage. For some people this can be an ideal method of raising their income level. I frequently meet with members who have no children and don’t care what happens to their home after they both die. Or, some members have high-cost debts that could be paid off with reverse mortgage money on which they never have to make any monthly payments.
With a reverse mortgage, you borrow against your home. If you still owe some money on your existing mortgage, it must be paid off.You can use some of the reverse mortgage money to do that.
A reverse mortgage allows you to borrow the money in a lump sum to pay off debts, invest, buy a second home, etc., or receive a monthly payment as long as you occupy the home. You also can take a blank-check open account approach and just withdraw whenever you wish up to the mortgage limit. Or, you can combine withdrawal methods. It’s very flexible.
The money you receive is not taxable – ever. Of course, since you are never making any payments, you have no deductions either. (Eventually if your estate or heirs pay back the mortgage, they may get some tax deductions.) Your loan proceeds are not considered income and will not affect Social Security or Medicare benefits. Your eligibility for other programs might be affected, so make sure you understand how that might work.
When using a reverse mortgage, you will still own the
home.You will still have normal ownership responsibilities of property
taxes, upkeep, etc.
Most up-front costs can be (and usually are) included in the mortgage, meaning little or no out-of-pocket payment by you.You never have to make any payments back as long as your home is your principal residence.You can still go to Arizona for the winter months. Once your home is passed to your heirs, the reverse mortgage becomes due.Your heirs may either Reverse mortgages good for some Can be used to pay debts or receive a monthly check A keep the home or sell it. If they sell it, they get to keep any excess sales proceeds after paying the mortgage.The estate has a six-month period with two potential 90-day extensions to satisfy the debt.
The amount owed to the lender will never exceed the value of the home at the time the loan comes due. In other words, your heirs will not be forced to come up with cash of their own to pay the mortgage.
Nice as this all sounds, it isn’t cheap. Let’s take the example of a $200,000 home (or condo) owned by a couple age 64 and 62 living in zip code 53719.
1. First of all, you will not be able to borrow even near what your home is worth. My $200,000 home example allows for a total mortgage of $120,400, the first $15,900 of which is the up-front fees or set-asides, which include:
Thus, in this example you have the ability to withdraw about $104,500 in whatever manner you choose. If my example couple chooses a regular monthly payment for life in this example it would amount to $603 per month (non taxable). And, you have little or no out-of-pocket expenses. (You may go to www.wellsrm.com to calculate your own example. Be sure, after getting the original screen showing the basics, you click on the “loan summary” key to get a second screen of details.)
2.You will incur a variable interest rate which is 1% plus the one-year treasury bill rate, plus a 0.5% HUD mortgage insurance rate.This interest charge is adjusted monthly. Currently that would mean a rate of about 6.6%, but if interest rates go up, it could go as high as 16.6% (although a one-year treasury bill rate of 15% would be highly unlikely). Again, you and your heirs will never be forced to pay anything out of pocket. It is all added to the mortgage balance. At worst – say you live to be 110, interest rates have been very high, and your home manages to go down in value – the best the bank can ever get, in effect, is the home and its eventual sale proceeds.
One important factor not mentioned above is that your income possibilities increase dramatically as you get older.The average age for beginning reverse mortgages is over 75.
Posted March 11, 2007