Learn best, worst ways to use re­verse mort­gage loan

Houston Chronicle Sunday - - PRIME PROPERTY - By Mar­cie Geffner BANKRATE.COM

Re­verse mort­gage loans al­low se­niors to bor­row against the eq­uity in their home and get a lump sum, line of credit or monthly pay­ments as long as they own and oc­cupy their home. Ex­perts say there are many uses that make sense in at least some sit­u­a­tions and only a few uses that al­most never make sense in any sit­u­a­tion.

“It’s in the eyes of the be­holder, al­most, as to what’s a good or bad rea­son,” said Eric Mee­han, owner/bro­ker of Golden Op­por­tu­nity Mort­gage, Solana Beach, Cal­i­for­nia.

Be­low are ways to use, and not use, a re­verse mort­gage loan.

Rules limit HECM use

Al­most all re­verse mort­gage loans to­day are home eq­uity con­ver­sion mort­gages, or HECMs. What is an HECM? A home eq­uity con­ver­sion mort­gage, or HECM, is FHA’s re­verse mort­gage loan pro­gram, en­abling se­niors to with­draw some of the eq­uity in their home if they need money. These loans come with fees, in­clud­ing an orig­i­na­tion fee that ranges from $2,500 to $6,000.

Changes in HECM rules in re­cent years have made it harder for se­niors to use these loans to strip all the eq­uity out of their homes and leave them­selves with­out the means to pay their prop­erty tax and home­own­ers in­sur­ance.

While the newer rules can be pro­tec­tive, they don’t guar­an­tee a HECM is ap- pro­pri­ate for ev­ery se­nior home­owner.

It’s im­por­tant to re­mem­ber that while a HECM doesn’t re­quire monthly pay­ments, you’ll have to re­pay your loan if you sell your home or move out for 12 months or longer, in­clud­ing any fees, ac­cu­mu­lated in­ter­est and mort­gage in­sur­ance pre­mi­ums.

Re­verse mort­gage loans also can be chal­leng­ing for non-bor­rower spouses, adult chil­dren and oth­ers who live in the home or might ex­pect to in­herit it.

Pay off large ex­penses

Per­haps the most com­mon use of a re­verse mort­gage loan is to pay off an ex­ist­ing home loan or line of credit, or to pay off or pay down other debt, such as credit cards, a car loan or med­i­cal bills.

“Some­times, some­thing hap­pens and (se­niors) do run up credit card debt and start strug­gling to fig­ure out how to pay that as well as liv­ing ex­penses. The re­verse mort­gage loan can help,” said Beth Pater­son, cer­ti­fied re­verse mort­gage loan pro­fes­sional at re­verse mort­gage loan SIDAC in St. Paul, Min­nesota.

Pay­ing off other home loans or con­sumer debt with a HECM elim­i­nates the need to use cur­rent in­come to make those monthly pay­ments.

Still, there are lim­its as to how much this strat­egy can help, said Greg Cook, vice pres­i­dent at Re­verse Lend­ing Ex­perts in Orange, Cal­i­for­nia. If the re­verse mort­gage loan is “a drop in the ocean” in debt re­pay­ment, the se­nior might be bet­ter off sell­ing the house, he said.

Fi­nance liv­ing ex­penses

Se­niors also can use a re­verse mort­gage loan to sup­ple­ment their in­come to en­hance or main­tain their life­style, such as after they re­tire or their spouse dies, Pater­son said.

That might mean pay­ing for ne­ces­si­ties like med­i­cal ser­vices, home med­i­cal equip­ment, at-home care, den­tal work, home re­pairs or ag­ing-in-place mod­i­fi­ca­tions. Or, it could mean pay­ing for dis­cre­tionary ex­pen­di­tures like buy­ing new clothes or fre­quent­ing a beauty sa­lon.

Fi­nan­cial plan­ning help

Fi­nan­cial plan­ning is an­other po­ten­tial use of a re­verse mort­gage loan. Strate­gies in­clude:

• Set­ting up a credit line for later use, if needed.

• Pre­serv­ing other as­sets to use later or to leave to heirs.

• De­lay­ing So­cial Se­cu­rity ben­e­fits.

• Low­er­ing in­come earned from other sources to avoid pay­ing in­come tax on So­cial Se­cu­rity ben­e­fits.

Mag­gie O’Con­nell, re­verse mort­gage loan spe­cial­ist at The Fed­eral Sav­ings Bank in Reno, Ne­vada, said, “If your in­come’s over a cer­tain amount, part of your So­cial Se­cu­rity gets taxed.

If in­stead you’re draw­ing from your HECM, which isn’t tax­able, you can keep (your in­come) un­der that thresh­old.”

Gift­ing money to kids

Gift­ing money to younger gen­er­a­tions to help them pay off stu­dent loans, make a down pay­ment to buy a house or for other rea­sons can be an­other use of a re­verse mort­gage loan.

“If their in­tent is to leave the prop­erty, what they ac­tu­ally leave is the eq­uity, so why not gift it?” Cook said.

O’Con­nell said us­ing a re­verse mort­gage loan as gift money can be smart if it doesn’t put the bor­rower at risk of run­ning out of money dur­ing his or her own life­time.

If the eq­uity in a home is “pretty much all you have on a low in­come,” you should be cau­tious “not to give it away too read­ily,” she said.

Down­size or up­size

A re­verse mort­gage loan also can be used to sell a home and pur­chase an­other. That can be help­ful for se­niors who want to down­size or re­lo­cate closer to their fam­ily or friends.

The new home can be larger or smaller and more ex­pen­sive than the sold home.

Cou­ples who di­vorce can use dual re­verse mort­gage loans to help them sell their cur­rent home and pur­chase in­di­vid­ual homes that fit their sep­a­rate needs, Cook said.

Buy an an­nu­ity?

One use of a re­verse mort­gage loan that’s gen­er­ally frowned upon is to pur­chase an an­nu­ity, a form of in­sur­ance that pro­vides a monthly pay­ment for the rest of a per­son’s life­time in ex­change for a sub­stan­tial up-front pre­mium.

Pater­son said that there are some “strict re­stric­tions” on this strat­egy and that se­niors “need to re­ally go in with their eyes open in mak­ing sure” it ben­e­fits them.

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