This week, the “Money Talks” case study takes a look at a widower who has assets that are forecasted to last 12-15 years, while his life expectancy is also 12 to 15 years. While on the surface, that sounds like perfect planning, that forecast assumes a definite rate of return and average inflation. A bad market run, an illness or any catastrophic event could easily impact his available funds for spending.
As an option, this widower is looking at a reverse mortgage. The U.S. Department of Housing and Urban Development created Home Equity Conversion Mortgages (HECM) for seniors age 62 and older that allows homeowners to convert their home equity into cash, either through a lump sum, monthly payments or an equity line of credit. In our widower’s case, he could use his equity to augment his cash flow, should something happen to derail his financial plan.
Many factors, such as, age of the borrower(s), interest rates and value of the home, affect how much equity is available to borrow. Generally, with a reverse mortgage, you can borrow the lesser of the appraised value or the HECM limit of $625,000. However, HECM loans come with significant charges and fees that you need to be aware of before taking out such a loan. You must pay both initial and annual mortgage insurance premiums; third-party charges, such as appraisal fees, inspection fees, credit checks and title searches; loan origination fees, which are often much steeper than traditional home loans, and servicing fees to the lender.
We have seen instances where a reverse mortgage of $50,000 was dropped to less than $42,000 after fees and insurance. The homeowner also has the responsibility of paying the annual taxes, maintenance and utilities for the home.
The question still remains, is it worth it? I’m sure you know my answer. It depends. Once the money runs out, and you’ve spent all you are able to borrow, you have nothing left to leverage. Some may first consider refinancing their current loan and perhaps take out equity; however, for many seniors, the emotional weight of carrying a mortgage is too much. Additionally, it may not be as easy to obtain a mortgage when you have limited to no income. With a traditional mortgage, should you die, your estate may pay off the loan, or your heirs may take over your loan payments.
With a reverse mortgage, payments on the loan are not due until the senior is no longer living in the home, either by moving or as a result of death. The home is then often sold to pay back the loan. If the home sells for more than the loan amount, any proceeds will pass to the heirs. If the home’s sale price is less, the heirs are not liable for the debt. Basically, the lender takes the risk that the home value will increase enough to repay the debt. Because of the way this loan is structured, it often works best for seniors who intend to stay in their home.
A reverse mortgage is a major financial decision that shouldn’t be taken lightly. You should have a financial adviser—not the reverse mortgage counselor—run the numbers for you to determine if a reverse mortgage is the best option for you. If you have questions about your mortgage and future cash flow, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
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