Q. I retired last year at the age of 64, and my wife has been a homemaker for quite a while. We are glad that I am retired and we are free to do what we want (we have quite a lengthy bucket list!), but we came to realize that, despite my pension, we just don’t have the sufficient income and assets to live on, and we’d like to hold off on collecting Social Security for as long as we can. On paper, we own our home in Northern Virginia, which has appreciated 600% from when we purchased it, so right now we’re equity rich but extremely limited on monthly income.
I have mixed emotions about reverse mortgages. Part of me knows we could really use the money to enjoy our retirement. Another part would never do that to our children. I would love to leave them with a good inheritance. But, my daughter and son are both doing well for themselves, and we are struggling. Can you tell me more about the pros and cons of reverse mortgages and whether you think they are a worthwhile option to consider?
A. Many seniors struggle financially in retirement, and consider a reverse mortgage as a way to generate extra cash to live comfortably.
With a reverse mortgage, you can borrow against much of the equity in your home. Instead of making monthly payments, the lender can send you monthly payments. The lender keeps a running tab of the interest and fees, and once you sell the property, move out (such as to a nursing home), or die, and the bank is entitled to be paid back the money the bank actually loaned plus accrued interest.
To be eligible for a reverse mortgage, you must meet certain criteria. First, you need to be at least 62 years old. Next, you must not only own your home, but have enough equity in it to support your loan. Furthermore, the home needs to be your primary residence and must conform to certain HUD standards.
Signing up for a reverse mortgage may or may not be the best solution for you, but it is a great option for a lot of people. Here are some of the benefits and disadvantages of reverse mortgages:
Benefits of reverse mortgages
- A reverse mortgage can provide you monthly income to help you cover your retirement expenses and, in the future, your and long-term care expenses.
- You won’t have to move out or give up the title to your home or sell it to get your hands on the money.
- A reverse mortgage can help you delay cashing out your retirement savings. This can be beneficial if your investments are performing well, or if the time isn’t right to liquidate them to free up cash.
- A reverse mortgage might help you delay Social Security and increase your ultimate Social Security benefits. For every year you delay Social Security past your full retirement age, you’ll get an 8% boost in benefits up until age 70. This extra income could be crucial as you navigate life later on as a retiree, and this extra income can seen as helping to offset the interest that is accruing on the reverse mortgage loan.
- Getting an FHA-insured reverse mortgage (called a HECM, which stands for Home Equity Conversion Mortgage) earlier than you really need it can actually help you in the future, because the unused pool of money that is available for you to borrow against grows every year regardless of whether the value of your home grows. This can be a very valuable feature because it essentially gives you access to “free” money the longer you have a HECM loan open. As an example, if your maximum loan value is approximately $394,000 and you don’t use those funds for 5 years, using a typical 3.75% accrual rate you would have available credit of over $474,000 in your credit line after 5 years. If you don’t use those funds for 10 years, you would have over $600,000 available to borrow from. And even if you do borrow from the funds, the remaining funds in the account still continue to grow at the accrual rate.
- FHA HECMs are “non-recourse” loans, meaning the property itself is the only thing at risk even if the outstanding loan amount exceeds the value of the property. There is never any personal liability to the borrowe or the borrower’s children. This protects the borrower and the children from owing on a loan that costs more than the house is worth when sold.
Negative aspects of reverse mortgages
There’s a downside to reverse mortgages, as follows:
- Some people think the fees and closing costs on your loan are too high. However, fees and closing costs have come down greatly in the past several years, and you can work out deals with some reverse mortgage lenders to reduce the fees and closing costs.
- Interest rates on reverse mortgages tend to be higher than rates for traditional home equity loans. Between these fees and interest charges, you might end up with less available cash to work with than you’d expect.
- If you’re struggling to afford your home, a reverse mortgage may not offer much in the way of a solution. Even with a reverse mortgage, you’re still responsible for maintaining your home and paying property taxes on it. If your loan amount doesn’t enable you to cover these costs, you may wind up having to move, regardless.
- If you’re hoping to leave your home to your children, a reverse mortgage might deter you from meeting that goal. Remember, with a reverse mortgage, your loan is paid off when you sell your home or when you die. So if you pass before vacating your home, your property will be sold to pay off your loan balance, which means it won’t be available for your heirs. So there aren’t any surprises, if you do decide a reverse mortgage is right for you, be sure to tell your children about it.
Weighing your options
If you’re having a hard time keeping up with your living costs, a reverse mortgage could give you access to money you don’t need to worry about paying back while you’re alive. And if you aren’t worried about leaving your home to your children, it could be a smart solution to your financial woes. On the other hand, reverse mortgages do have some drawbacks, so be sure to weigh the pros and cons before making your decision.
Something Else to Consider: New Rules for Reverse Mortgages
Reverse mortgages are complicated, and things have sometimes gotten messy for borrowers with surviving spouses or heirs who hoped to inherit the home.
Federal regulators have tried to fix many of the problems in recent years, and last year, the Federal Housing Administration announced another attempt to strengthen the program, by introducing the following rules, which will take full effect on Sept. 19, 2017:
- Borrowers need to seek third-party credit counseling prior to taking out the loan;
- Borrowers must demonstrate that they can manage home upkeep and pay property taxes and insurance;
- Lenders must fully disclose all HECM loan features;
- Include utility payments in the property charge assessment;
- Create a “cash for keys” program to encourage borrowers’ heirs (when there is no equity left in the property) to complete a Deed in Lieu of Foreclosure and gracefully exit the property versus enduring a lengthy foreclosure process;
- Monitoring efforts of appraisers will be ramped up;
- Underwriters will receive special training, allowing them to identify potentially overinflated appraisals; and more.
These new mortgage rules and previous changes help resolve some of the previous pitfalls that were associated with HECM loans, helping them regain popularity. For more details about this and HECM loans in general, and how they interact with Medicaid and the Living Trust Plus™ Asset Protection Trust, please read our previous article on reverse mortgages, Attitudes Are Changing About Reverse Mortgages.
If you or your loved one is facing the possible need for long-term care and/or thinking about getting a reverse mortgage, you should get an opinion from an experienced elder law attorney, such as myself before moving forward. Please call us to make an appointment for a no-cost initial consultation:
Fairfax Elder Law: 703-691-1888
Fredericksburg Elder Law: 540-479-1435
Rockville Elder Law: 301-519-8041
DC Elder Law: 202-587-2797