Retirement Income Blog

If you are retired, you may have discovered that your current income is insufficient to meet your living expenses, especially if you have unexpected medical or funeral bills.  In many cases, either liquid assets or insurance will be sufficient to meet these needs.  But in some cases, neither of these avenues is available.  Therefore, in order to meet your financial obligations, you may need to examine an important source of equity that you have probably spent much of your life accumulating the equity in your home.  New mortgage products that are now available on the market can be an invaluable source of tax-free income for needy seniors like you.  These programs are for seniors aged 62 and older that have either paid off their homes or have very low mortgage balances. 

There are two main types of reverse mortgages available to the public: federally insured reverse mortgages backed by HUD, and retail reverse mortgages backed by corporate lenders.  These mortgage products quite simply are designed to pay out a portion of your home’s equity in cash.  This will either take the form of a single, lump-sum payment, a set monthly payment (that continues either for a set period of time or for as long as you own your home) or most commonly as a line of credit.  For example, say you are living on a fixed income.  Then, a health issue arises that requires monthly bills to be paid, which are not covered by your insurance.  If you have no liquid assets set-aside to cover these costs, then you could take out a reverse mortgage on your house and receive a tax-free monthly (or single) payment to match your expenses.  Of course, the amount you are eligible for will obviously depend on such factors as the value of your home, current interest rates, your age and local lending limits.  A key advantage that these programs offer is that there is no medical underwriting of any kind involved, so any medical conditions that you may have will not prevent you from qualifying.  There are also no limitations on how the proceeds from a reverse mortgage can be spent; the funds can be used for anything.  If you are looking for an additional source of funds and would like to know more about whether a reverse mortgage is right for you, you can get no obligation quites form reverse mortgage lenders in your area.  

Note that as with any mortgage, there are points and other costs associated with the origination of the mortgage.  Interest rates for reverse mortgages generally are higher than traditional home mortgages and home equity loans. Additionally, fees and expenses associated with reverse mortgages are also higher than fees typically applied to traditional mortgages – sometimes as high as 4% to 8% of the mortgage loan amount. In addition, while typically there are no taxes on the proceeds of a reverse mortgage, the income or lump sum received could impact eligibility for various state and federal benefits, including Medicaid. Further, depending on the laws of a state, a reverse mortgage may not enjoy the same home-equity protection that would otherwise apply if a homeowner had a health emergency and needed to enter a nursing home. Reverse mortgages should not be used to speculate with home equity.

Before you obtain a reverse mortgage, federal rules require that you have an education session with a government appointed consultant to make sure you understand all of the terms and so that you can ask your questions to an impartial source.

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Use of nontraditional mortgages has increased among home buyers, according to a Wall Street Journal Online/Harris Interactive poll–could you benefit too?

There are four major types of non-traditional mortgages:

1. Interest-only mortgages, which have received considerable media attention as home prices have skyrocketed, allow borrowers to pay interest but no principal during the early years of the loan.
2. Piggyback mortgages combine a standard first mortgage with a home-equity loan or line of credit, thereby allowing the borrower to avoid paying private mortgage insurance or higher interest rates on jumbo loans.
3. Miss-a-payment mortgages let borrowers skip up to two mortgage payments per year, and up to 10 payments over the life of the loan, without damaging their credit rating.
4. Payment option mortgages give borrowers four-payment options–not when they take out the mortgage, but every single month.
   These include
   1) a payment based on a 30-year amortization table which, if made every month, will pay off the mortgage in 30 years;
   2) a payment based on a 15-year amortization table, which, if made every month, will pay off the mortgage in 15 years;
   3) an interest-only payment, in which the principal balance will remain unchanged; and
   4) a partial-interest payment, in which part of the interest is deferred and added to the principal balance.

The chart below illustrates the reduced payment on an interest-only loan.

Source: Archer Pacific, as of October 2006 (www.archerpacific.com/compare%204%20mortgage%20loans%20calculator.html). This example is hypothetical. You may not be eligible for any of these loans, and if you are, interest rates on loans will vary based on your financial circumstances and prevailing interest rates.

If you want to buy more house than you can afford with a traditional mortgage, these options can be good tools, and more people are using them. The Wall Street Journal Online/Harris Interactive survey found increased usage of three of four types of nontraditional mortgages from 2005 to 2006.

But borrower beware: Non-traditional mortgages can be riskier than standard fixed-rate or adjustable-rate mortgages. For example, with payment option mortgages, borrowers who elect to make the minimum payment could see their loan balance rise, rather than fall. That’s because the deferred principal and interest payments get tacked onto the home owner’s total debt, a process known as negative amortization.

Specifically for seniors are reverse mortgages.  If you have sufficient equity, these will allow you to pay off your traditional mortgage and even pay you.

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Seniors who are in a cash flow bind because of increasing expenses or a drop in their investment income may want to look into tapping one of their most valuable assets: their homestead.

There are several ways to do this.  Homeowners could sell the home, but they would have to move.  Or they could take out a loan against it, which would leave them with payments to make each month.  The third choice is a reverse mortgage.   

A reverse mortgage is a non-recourse loan that lets homeowners over 62 years old convert the equity in their house into cash.  Yet it allows them to still live there, and retain title and ownership.  The lender will give the payout all at once, as a fixed monthly income (up to lifetime), as a line of credit, or as a combination of these.

The money will have to be paid back with interest when your clients die, sell the home, or permanently move out.  But they or their heirs have the option to pay off the reverse mortgage at anytime and keep the house.  And the amount that must be repaid can never exceed the value of the home.  Furthermore, if the sales price exceeds the amount owed, the excess will go to the homeowner or their estate.

There is no income or medical requirement to qualify for a reverse mortgage.  And borrowers can use the money any way they wish, for example, to pay daily living costs, medical bills, or travel expenses. 

The size of the reverse mortgage depends on several factors, including the youngest homeowner’s age, the home’s value, and current interest rates.  The money they receive will be tax-free and will not affect Social Security or Medicare benefits.  However, it could influence Medicaid qualification. 

Take for example, Bill and Marge, ages 65 and 63 respectively.  They own their home, which is valued at $250,000.  Bill had to close his part-time consulting business because of health problems, and the loss of this income forced them to cancel a once-in-a-lifetime cruise that they had been planning for the past year.  A reverse mortgage offered Bill and Marge the following options:¹          

            Single lump sum or line of credit - $140,285

            Lifetime monthly income - $784

 They chose the line of credit and took out enough to pay for their cruise and single-pay LTC insurance policies. They’ll keep the balance of the available cash for another vacation, for an emergency, or to supplement their income in the future.

More information and a list of reverse mortgage lenders in your state are available from the National Reverse Mortgage Lenders Association.  This source of retirement income promises to become more common as baby boomers with inadequate retirement savings tap whatever home equity they have.

 
¹ http://www.rmaarp.com/estimates.htm

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