Is a Reverse Mortgage Right For You? Evaluating the Pros and Cons

    May 06,2015

    By Scott Cohen


    As with any type of loan made to the senior demographic, assessing the health, wealth and legal structure of the estate is crucial. A reverse mortgage is structurally similar to a typical conventional mortgage with many nuances designed to help seniors. There is no required payment, yet one can be made at any given time. You can make interest payments or decide to pay on your principal. The lender does not own the property and does not have the power of sale, unless the homeowner violated covenants listed in the closing loan documents.

    Additional advantages include:

    Paying for long-term care costs
    For many seniors, estate planning may not include a long-term care policy. Yet, there's good news for homeowners with considerable home equity. It's possible to obtain a reverse mortgage to pay for that care and the cash-out proceeds are tax-free (always consult a professional tax advisor).

    Avoid Medicaid lien attachments
    Reverse Mortgages record two liens on one's property. Both are lien's, but the 2nd is not a loan, it's a HUD lien for an equal amount of the first, or much higher, depending upon the property value. When Medicaid services are deployed, they will try to attach a lien to a property and will see there's no equity and will not go into 3rd position, until the property is sold during their lifetime or upon the estate settlement.

    Improves one's ability to age in place
    Aging in place is a goal most Americans strive to attain. By eliminating a required mortgage payment, a reverse mortgage can increase monthly cash flow and help preserve liquid and non-appreciated assets that would be included in the estate. A reverse mortgage along with other estate planning strategies helps with this preservation.

    Outliving the loan and loss of all equity "advantage"
    Reverse mortgages are considered "open ended loans," but what happens at the end of a fixed- rate 30 year-term? Do you have to move out? No, on the contrary, if a homeowner is still living in the home, they can keep living there with no payment required!
    When selling the home, what if it's "upside down "in value –in other words, you owe more on the loan than what the home is worth. Reverse Mortgages are "non-recourse" loans which means you do not have to make up the loan difference or deficiency if you decide to relinquish your home. Also, the borrower and lender are protected from any losses through monthly mortgage insurance premiums.

    Qualification are much easier
    For many homeowners on fixed incomes, the likelihood of qualifying for a conventional mortgage with increased payments is challenging. With a reverse mortgage, the qualifying emphasis is on paying your property taxes, homeowners insurance, and property upkeep with less emphasis on your credit history (this depends on your personal credit history).

    Estate picks up the unpaid interest when liquidated (heirs could get benefit)
    With a traditional mortgage, homeowners deduct mortgage interest paid at the end of the year. With a reverse mortgage and sizable estates, whatever mortgage interest accrues throughout the life of the loan, the estate recognizes it when the estate is liquidated. This means any interest you owe is deferred and taxes are offset with no capital gains until the property is sold.

    Cure deferred maintenance on property thru escrow
    A reverse mortgage can fund and close prior to the curing of the deferred maintenance (deferred maintenance is the practice of postponing necessary repairs or improvements to the property). This feature is not readily available on most conventional loans and must be monitored closely, as properties must be appraised in average "as is" condition and cannot have excessive deferred maintenance. The result from curing deferred maintenance increases the chance of obtaining "top dollar" for the property when it's eventually sold.

    Choice of payment options
    Homeowners have the ability to adjust their current and future cash flows with various payment options. When obtaining a fixed-rate product, a "lump sum" is the only option. When an adjustable-rate mortgage is utilized homeowners may select a combination of: lump sum; line of credit and monthly stipend payments over a specified term. Close attention must be paid to the overall structure of a seniors' estate and cash flow analysis, in order to avoid constant restructuring and lowering all potential costs involved.

    New options with reduced closing costs
    With the advent of a "HECM SAVER" program, loan costs are dramatically lower and in some instances, upfront mortgage insurance may be waived. This saves borrowers a considerable amount of money, making it more attractive to consider a reverse mortgage. Be sure to ask your loan representative for details.

    Unlimited flexibility to change your payment structure
    The borrower may change the payment plan at any time. There is no limit on the number of times a borrower may request a change. The servicer will charge the borrower a fee of $20.00 for each change occurrence and this fee may be financed and added to the loan balance.

    Ability to make loans to a LIVING TRUST
    Excluding the state of Texas, a reverse mortgage may be made to a *revocable trust. This is not common in the "forward mortgage" world, as residential loans are typically made to natural persons. On a case-by-case basis, a reverse mortgage may be made to an irrevocable trust, but if the irrevocable trust does not allow for principal distribution, an additional review by the lender's counsel is required. A homeowner must supply the complete trust, but if not available, a **Certification of Trust or an Abstract of Trust may be utilized, on an exception basis.


    Loss of future equity / value of estate
    If there's any home equity left when an estate settles, this reduced amount will adversely affect the net distributions to desired beneficiaries. Please note that utilizing a reverse mortgage and getting cash out reduces the value of one's estate anyway!

    Loss of annualized interest deductions if payments are not made
    Conventional mortgages have the benefit of an annual mortgage interest deduction. A reverse mortgage doesn't require payments and therefore cannot benefit from deductions. If deductions are needed today or in the future, a reverse mortgage is not the answer.

    Can't put on a subordinated lien
    Reverse mortgages will appear on title as two liens. The first is in the lender's name and the second will be in the name of HUD, for the same amount as the first. This is done to make sure there aren't any subordinated liens being placed on the property. However, this means that you will be ineligible to secure another loan on your property.

    Homeowner must occupy the property as primary residence
    Although a reverse mortgage is beneficial in so many ways, second homes and rental properties are not eligible for seniors age 62 and above. Annual inspections are performed in order to maintain compliance. If your Reverse Mortgage expert, in conjunction with your financial planner, have strategized that your property will eventually be used as rental income, then a Reverse Mortgage is not for you!

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