Reverse mortgage basics

Posted: Tuesday, March 01, 2011

Normally, religion is a good thing. However, one’s faith can be misplaced. We’ve found that people “get religious” about the strangest things.  Readers have said, “I don’t believe in mutual funds.” Others “do not believe in reverse mortgages.” Yes, many products can be mis-bought or mis-sold, but each has its purpose. When applied properly, they can be potentially beneficial.

We think it’s best not to “get religious” about financial products. Let’s go to this month’s question about reverse mortgages.

“Dear Senior Money Matters: A mortgage broker has suggested that I purchase a Reverse Mortgage. I am single and living on $1,300 a month from Social Security plus $113 a month from a corporate pension. I have saved $10,000 for emergencies, but could sure use the extra income this broker was discussing. My house is worth $185,000 and I paid it off three years ago.”

Glenda
Suwanee, GA

Dear Glenda: Your interest in reverse mortgages (RMs) is well founded. Today, many find their biggest asset is their home. Based on a person’s circumstances, using an RM may be very helpful, but it takes some serious thought. Here are a few basics to get you started.

First, a RM is special type of home loan that allows you to convert part of the equity of your home into cash. It’s what’s known as a “non-recourse” loan. This type of  loan must be repaid in full with interest when you die, sell, or permanently move out of your house. After the loan is paid off, the balance will be given to your heirs. If the house is sold for less than the balance of the reverse mortgage, the lender only receives what comes from the sale of the house and nothing more.

Second, to be eligible for a reverse mortgage, the Federal Housing Administration requires that all homeowners be at least 62 in order to qualify. How much you receive from the loan depends on the fair market value of your home. You must own your home outright or have a low mortgage balance that can be paid  off at closing with the proceeds from your reverse mortgage.

Third, it is important to know that RMs may have tax consequences. They do not affect your Social Security or Medicare, but can affect your Social Security Disability or children’s income from the death of a parent, medical, or other public benefits. Also, the interest on the loan is not deductible.

Fourth, there are four different program types: Immediate Cash Advance, Credit Line, Monthly Income or a Combination Loan. To qualify for most loans, the lender will check to see if you can pay them back. However, since you do not have to make monthly payments with RMs, you do not need income to qualify.

State and local governments generally offer the lowest fees on RMs, but these RMs must be used for specific purposes, such as repairs or property taxes. It is important to know the rules, fees and interest rates for the different loans, in order to pick what is best for you.

Lastly, the Federal Housing Administration (FHA) has the only RM insured by the Federal Government.  It is called the Home Equity Conversion Mortgage (HECM).  Although HECM’s are more expensive than other loans, they can generally be used for any purpose.

Glenda, we have just scratched the surface here, so do your homework and seek professional advice to make sure you have a plan that will allow you to enjoy your retirement.

We want to thank Laura Stohlman, CFP®, for her invaluable assistance as this month’s co-author.

Dan Searles and John Stohlman, of Medallion Financial Group, are CFP®’s and Registered Representatives with over 25 years of experience in the financial industry.

Securities and advisory services offered through National Planning Corporation (NPC), member FINRA/SIPC, a Registered Investment Adviser. Medallion Financial Group and NPC are separate and unrelated companies.  They manage over $250 million of client assets. For further info, questions or comments regarding this article, Dan and John can be reached at 1-800-878-9704 or Dan@MedallionGroup.com.

This is not a solicitation to participate in a Reverse Mortgage.  National Planning Corporation does not endorse the opinions expressed in this column.

The information contained in this article is not to be considered as financial, tax, or legal advice.  As with any financial or legal matter, consult your qualified securities, tax, or legal advisor before taking action.

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