Today, seniors are finding it more and more difficult to invest for income. Thankfully, the social security benefits went up 5.8% this year. But that’s about all that has gone up. With concern over risk, seniors are starting to look closer to home for a source of income.
Reverse mortgages are becoming more popular. HUD’s Federal Housing Administration (FHA) created the first reverse mortgage. A reverse mortgage enables you to withdraw some of the equity in your home. A FHA reverse mortgage is a safe plan that can provide older Americans greater financial security.
A reverse mortgage is a special type of home loan that lets you take part of the equity in your home as cash, as a monthly income stream, or a combination of both. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer uses the home as their primary residence.
To be eligible for an FHA reverse mortgage, you, (the homeowner), must be at least 62 years of age or older. You must own your home outright or have a low mortgage balance that can be paid off with the proceeds from the reverse mortgage. You must also receive consumer information from an approved Home Equity Conversion Mortgages (HECM) counselor prior to obtaining the loan. An eligible home must be a single family home or a 1-4 unit home with one unit occupied by the borrower. Condominiums and manufactured homes that meet FHA requirements are also approved.
Advantages of a Reserve Mortgage
You can qualify for a reverse mortgage regardless of your income. You cannot outlive the loan, as long as you continue to live in the house. You are, however, required to pay all real estate taxes and keep your insurance current. You can never owe more than the value of your home.
If you move, or if your heirs sell the home, the proceeds are used to pay off the balance of the reverse mortgage, plus interest and other fees. The remaining equity is yours or your heirs.
The amount you can borrow depends on your age, current interest rates, the appraised value of your home or the FHA limits. Good news: The stimulus plan, just enacted, raises the FHA limit to $625,000 from $417,000. Generally, the older the borrower(s), the lower the interest rate… and the higher the home value, the greater the amount of the reserve mortgage.
You have five options under a reverse mortgage:
1. You can decide to take monthly payments as long as at least one of the
borrowers lives and continues to occupy the property. This provides income
that you can never outlive.
2. You can opt for equal monthly payments for a fixed period of time.
3. You can establish a reverse mortgage and use it as a line of credit, drawing from it on an as needed basis.
4. You can take part out in cash, and the rest on a monthly income for life.
5. You can take part out in cash, and the rest in equal payments over a specific time period.
Let’s look at an example… Jim and Mary Smith. Jim was born in 1930 and Mary was born in 1932. They own a home, their primary residence, ouright. The current value of their home is $360,000. Using today’s interest rates and mortality tables, the Smith’s could receive a monthly income equal to a little more than $1,600. This income would not be subject to tax, nor count against the taxability of their social security benefits. But more importantly, the income would continue as long as one of the borrowers lived
in the home. Conversely, they could take out a single lump sum of $242,820 today, or a combination of the two. If they established a reverse mortgage line of credit today, but did not take any of the proceeds out, that amount would continue to grow. In five years, the line of credit would be over $296,000.
The reverse mortgage is not a panacea. It does offer the ability to increase your nontaxable income without fear of being thrown out of your home. But, you are required to live in the home and make all necessary tax and insurance payments.
Your first step is to talk to a Money Concepts’ advisor about your retirement income. Let them look at your entire financial picture. By doing this, you will be in a better position to get the best possible advice. Our advisor will be able to let you know if it makes sense for you to further explore a FHA reverse mortgage.
Money Concepts does not provide FHA reverse mortgages, for more information, contact the Multifamily Housing Clearinghouse (MFHC), and they will provide you with an FHA-approved counseling agency and a list of FHA approved lenders.