The reverse mortgage products offered today have gone through a major makeover of sorts in recent years in the pursuit of consumer protection. The overwhelming majority of the reverse mortgages originated in recent years are the FHA Insured Reverse Mortgage product known as the HECM, an acronym for Home Equity Conversion Mortgage. These are some of the questions I have received recently from clients.
Q: I have heard there are some new changes that have to do with qualifying. How does that work?
A: Financial Analysis is a relatively new qualifying process that is required for all new reverse mortgage borrowers after April of 2015. The purpose is to determine if the borrower will have the ability to maintain the taxes, insurance and maintenance of the home as well as meeting all of their other financial obligations and household expenses.
Q: Why was this Financial Analysis process put in place?
A: Before this process was required, anyone with sufficient equity over the age of 62 was eligible for a Reverse Mortgage as long as the property met minimum FHA property standards. This new process will help to add an additional measure of protection. It does so by helping to assure that a senior’s equity is not being wasted irresponsibly by incurring the costs of a reverse mortgage only to be faced with moving or foreclosure a short time later because they could not afford the other related obligations of homeownership and their other living expenses. One consequence of this new process is that some borrowers who thought this would be available as a financial safety net may find that it is no longer an option because they do not qualify under the new guidelines.
Q: My Financial Advisor mentioned putting a Reverse Mortgage in place now even though I don’t need one. Why is that?
A: Many Financial Advisers believe that a reverse mortgage has certain features that could provide a measure of financial security and risk avoidance. By allowing a person to access tax free income from a Reverse Mortgage instead of depleting savings or taxable retirement accounts earlier than preferred, other retirement investments are allowed to continue to grow tax free. By putting the Reverse in place now, even if not needed, the loan proceeds are available and accessible when needed regardless of any new changes that might be made to the reverse Mortgage program in the future.
Q: Wouldn’t it cost a lot of unnecessary interest by borrowing money that I do not yet need?
A: The money that is available but not yet accessed remains in a line of credit to be used in the future. Interest charges only accrue on the money actually drawn and borrowed. No interest is charged on the funds available but not yet drawn.
Q: Wouldn’t there be more money available if I just wait until I am older?
A: One of the unique features of a Reverse Mortgage line of credit is that the unused portion of the line of credit continues to increase every month that it is not accessed. So by putting it in place before it is needed, the amount available for future use is actually growing each year and may even be higher than would have been available by waiting to obtain it in later years.
Q: I would like to meet with my financial adviser to discuss this. Is it possible for you to meet with both of us to discuss this?
A: Yes. We work very closely with legal and financial advisers of all types including CPA’s, Certified Financial Planners, Estate Planning Attorneys and Insurance Specialists as well as any other family members to be sure that the financial goals of our clients are achieved.
Q: Is it true that a Reverse Mortgage can pay off my present mortgage and provide me with additional monthly income?
A: The proper answer is - it depends. There are specific maximum limits for the amount of funds available for both these purposes. These limits are based on the payoff balance of your present mortgage, the present value of your home and your age.
There are many other questions that should be carefully considered by anyone facing this important decision. It needs to be done with an eye towards your personal situation and the individual goals you seek to attain. Whenever possible, it is helpful if that decision can be made with your other trusted advisers included in the conversation.