Reverse Mortgage – Supercharge Your Retirement or Burn Your Assets

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With a reverse mortgage the bank pays you for as long as you remain in your home. The loan never has to be paid back until the borrower moves or dies. Payback -- principal plus interest -- can never exceed the value of the home. But are Reverse Mortgages too good to be true? "For those age 62-plus, a reverse mortgage is a great way to augment retirement income. Affluent couples can use a reverse mortgage to pay for a vacation home and generate cash to accelerate gifting," says Paul J. Mauor, CLU, CHFC, founder and CEO of Legacy Financial Advisors, Inc., headquartered in Milford, MA.

If home prices in your area are modest -- $200,000 or less – and you have limited means, a reverse mortgage can deplete assets, leaving you without cash for emergencies. Tax abatements or other options, can help seniors remain in their homes.

Reverse Mortgages are getting a lot of attention, but are they too good to be true? For couples that want to stop making mortgage payments and get cash for retirement, a reverse mortgage can be ideal. Both borrowers must be age 62 and there are no income requirements. The home must be their primary residence, property taxes have to be paid and homeowners’ insurance is required.

The proceeds, including interest, do not have to be paid back until the house is sold -- to move into a nursing home or condominium, or when both spouses die. Neither the couple nor heirs can ever be compelled to pay back the loan even if the principal and interest exceed the value of the home.

Reverse mortgage proceeds can be paid out as monthly installments or a lump sum or, the money can be left in an account that is similar to a line of credit except it earns interest. A combination of all three is possible too.

So, what’s the catch? “Like every financial tool or investment, a reverse mortgage must meet individual needs,” says Paul J. Mauro, CLU, ChFC, founder and CEO of Legacy Financial Advisors, Inc. (http://www.lfsadvisors.com) of Milford, MA.

Mauro’s firm specializes in estate and financial planning. He adds, “The goal of a reverse mortgage is to get cash out of the equity in your home. A line of credit or home equity loan would incur monthly payments. Selling is an option. But if the couple has owned their home for decades, selling will incur a capital gains liability, plus brokers fees and moving costs. With a reverse mortgage, the couple stays put and, as with any loan, the proceeds are tax free.”

A reverse mortgage contrasts sharply with selling to raise money. If the home and improvements total $100,000, and it is sold for $900,000, the increase in value over $500,000, or $300,000, would be taxed as capital gains. At 20%, that’s $60,000. Add real estate broker’s fees and moving costs and the bite can be over $100,000. The couple still has to find an affordable place to live.

Reverse Mortgages covered on AARP’s website (http://www.aarp.org/money/revmort/) include The Home Equity Conversion Mortgage (HECM) insured by the Federal Housing Administration and Homekeeper Mortgage, guaranteed by Fannie Mae. FHA and Fannie Mae backing mean that if the lender fails to meet its obligation, payments to the homeowner will continue.

Jumbo Reverse Mortgages

FHA and Fannie Mae Reverse Mortgages are limited, paying out no more than about $1,400 per month. In addition to these programs, jumbo reverse mortgages that can be a useful financial tool – especially for those living areas where housing is costly.

Explains Mauro, “Let’s say a couple owns a paid-up $700,000 house near Boston. They want to buy a $400,000 winter home in Florida. Take out a reverse mortgage and use the proceeds to buy that winter getaway for cash. The reverse mortgage proceeds may even be large enough to cover property taxes and utilities. The result -- a second home that may increase in value, with no monthly mortgage payments on either property.”

Mauro adds, “Many couples wind up owning million-dollar-plus homes with small mortgages, say --$100,000 -- from borrowing for the children’s college tuition. The couple now wants to retire.

"A reverse mortgage halts the $800-$900 monthly mortgage payments and generates additional monthly income to cover property taxes and utilities. If the home is in a prime area and well maintained, there’s a good chance its value will increase over the next 15 years. The couple may then want to sell the home, repay the reverse mortgage and buy a modest condo near children.”

Reverse mortgages help wealthy couples too. They can access large amounts of cash, tax-free, to accelerate estate gifting to children and grandchildren, or even buy second-to-die life insurance that will pay a death benefit when both parents die. “Heirs may use the death benefit to pay estate taxes or repay the loan, should they want to keep the house. A policy with a million dollar death benefit will cost a 62-year-old couple as little as $100,000 -- 10 cents on the dollar,” notes Mauro.

Payback and Cautions

“Life is full of surprises,” advises Mauro, “Plans to remain in one’s home can change. With a reverse mortgage, compound interest accumulates on the principal paid out. This can add up. Consider the amount owed after 10 years or so.”

Fannie Mae estimates that if a couple takes monthly payments of $300 or $3,600 annually, at the end of 10 years, they would owe $69,702— $36,000 in monthly loan advances and $33,702 in interest. The home may appreciate in value to offset this cost. For details see Fannie Mae’s Money From Home at: (http://www.fanniemae.com/global/pdf/homebuyers/moneyfromhome.pdf)

Warns Mauro, “Do not get a reverse mortgage in these situations:

“If you plan to move within 10 years – origination costs, including insurance and fees, can reach $10,000 or more -- too high to make it worthwhile. Consider a line of credit instead.

“If your home is part of a legacy and the children definitely want to keep it in the family, repaying the proceeds from a reverse mortgage may be too burdensome for the heirs.

“If you have substantial net worth and don’t need additional income or cash.

“If you will enter a nursing home soon.

"If home prices in your area are modest -- $200,000 or less – and you have limited means, a reverse mortgage can deplete assets, leaving you without cash for emergencies. Tax abatements or other options, can help seniors remain in their homes.”

Emphasizes Mauro: “Speak to a financial advisor who knows you and your financial situation before taking out a reverse mortgage. One size does not fit all.”

Editorial Contact: Dick Pirozzolo 781-235-9911

Legacy Financial Advisors, Inc. (http://www.lfsadvisors.com) has over 30 years of experience helping families with retirement, aging issues and estate planning and was featured in the PBS special "And Thou Shalt Honor" broadcast by WGBH-TV. Its six Massachusetts offices are in Milford, Waltham, Yarmouth Port, Natick, Peabody, and Braintree. Other Legacy representatives are located in Rhode Island, Maine, New Jersey, New York, Pennsylvania, Florida and Texas. Securities are offered through Legacy Financial Services, member NASD/SIPC. Legacy Financial Advisors, Inc., 321 Fortune Blvd., Milford, MA 01757. Tel. 800-427-9781

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