Learn best, worst ways to use reverse mortgage loan
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.