Properly Assessing the Reverse Mortgage Option: Know the Costs, Benefits, and Alternatives for This Retirement Funding Tool

By Lynch, Nicholas C.; Pryor, Charles R. | Journal of Accountancy, July 2012 | Go to article overview
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Properly Assessing the Reverse Mortgage Option: Know the Costs, Benefits, and Alternatives for This Retirement Funding Tool


Lynch, Nicholas C., Pryor, Charles R., Journal of Accountancy


EXECUTIVE SUMMARY

* Although they have been criticized for high associated fees, reverse mortgages can provide cash for qualifying homeowners (62 or older) to meet immediate needs, in a lump sum, as fixed monthly payments for the lives of the owners, or as a line of credit.

* The leading product, the Home Equity Conversion Mortgage (HECM), is insured by the federal government and limits the payback amount to the value of the home at the time the loan is due.

* A newer version of HECMs, the HECM Saver loan, features lower upfront costs, including a lower initial mortgage insurance premium.

* Alternatives to reverse mort gages should be explored by clients with their financial advisers, including a home equity loan, second mortgage, and selling the residence. The latter option might include a leaseback arrangement.

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The recent recession left no age group untouched, but baby boomers were hit especially hard. High unemployment and an uncertain stock market have caused older Americans to realize that their retirement funds might not support their desired lifestyle. Many seniors are facing foreclosure, while others are unable to meet their basic needs, such as paying medical, energy, and other daily living expenses. A reverse mortgage can enable homeowners who are at least 62 years old and have sufficient equity in their homes to receive enough cash to live more comfortably throughout retirement.

A reverse mortgage is a loan against home equity that requires no repayment until the home is sold or the last surviving borrower dies or no longer occupies it as a principal residence. At that point, the home may have to be sold to repay the loan. The loan amount is designed to be no more than the home's value. But if sale proceeds are insufficient to repay the mortgage, the borrower's estate is not liable for the difference.

Reverse mortgages have been criticized for having high fees, as well as for forcing borrowers to remain in the home for an extended period and preventing borrowers' heirs from obtaining a valuable estate asset, the home. For these reasons, reverse mortgages have been looked upon by many CPAs and financial advisers as a last resort. However, recent changes to reverse mortgage instruments are making them more attractive for qualifying individuals.

This article takes an in-depth look at reverse mortgages, highlighting recent changes and discussing the advantages, disadvantages, and alternatives. The article focuses on reverse mortgage instruments insured by the U.S. Department of Housing and Urban Development (HUD), through the Federal Housing Administration (FHA) and its Home Equity Conversion Mortgage (HECM) program. HECMs are the lowest-cost reverse mortgage products on the market and make up about 90% of current reverse mortgages. All CPA financial advisers should be aware of the options and be ready to discuss whether these instruments are viable choices to help qualifying clients remain in their homes while obtaining necessary cash.

[ILLUSTRATION OMITTED]

MUST BE A FIRST MORTGAGE

An HECM must be a first mortgage. However, reverse mortgage proceeds may be used to pay off an existing mortgage on the primary residence. The loan can be taken in a variety of payment options: a lump sum, fixed monthly payments for life or a fixed term, a line of credit, or some combination. Borrowers never have to make principal or interest payments during their lifetime. The loan can be repaid at any time, but as long as the homeowner does not move or vacate the primary residence for longer than 12 months (for any reason, including going into a nursing home), allow the property to deteriorate, or default on property taxes or hazard insurance, the loan does not have to be repaid until all of the homeowners are deceased. At that time, the principal and accrued interest is paid back by the homeowner's estate.

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