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The Leavenworth Times - Leavenworth, KS
  • LV Times financial columnist: Pros and cons to reverse mortgages

  • Reverse mortgages are a relatively new financial tool that can provide additional income to retirees living on a fixed income. It's an ideal tool for folks that are house rich and cash poor.
    Reverse mortgages have been growing in popularity as more and more retirees are getting comfortable with the concept of using the equity in their home to supplement their retirement income.
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  • Reverse mortgages are a relatively new financial tool that can provide additional income to retirees living on a fixed income. It's an ideal tool for folks that are house rich and cash poor.
    Reverse mortgages have been growing in popularity as more and more retirees are getting comfortable with the concept of using the equity in their home to supplement their retirement income.
    There are a number of lenders that do reverse mortgages in the private sector, however, the most widely available program is operated under the auspices of the federal government. The Federal Housing Administration (FHA) insures reverse mortgage loans made by private lenders under its Home Equity Conversion Mortgage (HECM) program.
    If a lender fails to make the promised payments, the FHA takes over responsibility for fulfilling the lender’s obligations. The HECM program has loan limits. Beginning in 2009, the federal government began insuring reverse mortgages which allow qualified borrowers to sell their existing home and then to use the proceeds from the HECM program to buy a new home. Essentially, it allows individuals to downsize their homes in a single transaction.
    Now, most of us understand how mortgages work. We buy a home and start making our payments. Over time, the amount we owe on our home decreases and the amount of equity in the home increases. Equity is the difference between how much we owe on our home and the current market value of the home. A reverse mortgage allows us to tap into that equity without making loan payments until the home is sold.
    Reverse mortgage programs require all borrowers be at least age 62. The home must be owner-occupied and be the borrower’s principal residence. Not all homes qualify. All single-family detached homes qualify, but not all lenders will allow other types of homes such as multiple unit owner-occupied, condominiums and manufactured homes.
    Only first mortgages are permitted. That means if there is an existing mortgage on the home, it must be paid off by the reverse mortgage before you can draw on the remaining equity.
    The amount of equity that will qualify for a reverse mortgage varies from lender to lender. During the term of the mortgage, the borrower must live in the home and is responsible for payment of property taxes, maintenance/repairs and home insurance. No payments are required as long as at least one borrower lives in the home. The outstanding loan balance, plus any accrued interest, is payable when the last borrower sells the home, permanently leaves the home, dies or fails to carry out their obligations.
    As an investment advisor, I have recommended reverse mortgages on a number of occasions. Older seniors tend to be very uncomfortable with the concept of taking on additional debt to provide more income during their retirement. That is not as much of a problem for Baby Boomers, so I suspect that reverse mortgages will become much more common in the future.
    Page 2 of 2 - So, reverse mortgages are certainly worth kicking the tires for retired folks who don’t have sufficient income, who have a lot of equity in their home and don’t really care about passing their home onto the family as part of their legacy. They can draw additional income on the equity from their home and when they both pass on, the home will be sold to liquidate the debt.
    Lastly, many seniors never purchased long-term care insurance. By the time they realized they needed it, they were too old and it was no longer cost effective. A reverse mortgage may be a very useful tool to provide the necessary funds to offset the cost of long-term care.
    Additional resources are available at the following websites:
    • U.S. Department of Housing and Urban Development: http://hud.gov/
    • Federal Trade Commission: http://www.ftc.gov/
    • American Association of Retired Persons (AARP): The AARP provides publications of reverse mortgages. The AARP website is http://www.aarp.org
    A primary resource for this article was the Back Room Technician website by Advisys, Inc.
    Larry Martin is an investment advisor representative offering advisory services through Mader & Shannon Wealth Management, Inc., in Kansas City, Mo. If you would like to comment or make any suggestions, contact me at larrymartin@theretirementexperts.us  or call at 651-4321.
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