Reverse mortgages good for some
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:
- 2% of your home’s appraised value for FHA insurance ($4,000).
- 2% of your home’s appraised value for origination fee ($4,000).
- Closing costs vary by state, but we’ll assume $2,700 in Wisconsin.
- A monthly $30 service fee set aside from available funds, but not
actually charged in advance (for example, if you die in six months,
you would only be charged for six months, or $180). The set-aside
in this example though is $5,200.
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