Credit: Shutterstock photoSeniors may want to tap their home's equity for retirement cash flow. But selling the home might not be desirable or practical.
One solution: a reverse mortgage. Recent rule changes have made them harder to get. But other wrinkles add safety and flexibility.
Reverse mortgages are loans. You get cash backed by your home. Only primary residences can secure this loan. You owe interest on the loan you receive, which you or your heirs pay along with principal in a lump sum when you vacate the residence or die and the house is sold.
If the home is sold, any excess proceeds go to you or your heirs.
Nearly all reverse mortgages are called Home Equity Conversion Mortgages (HECMs) by the Federal Housing Administration. Private lenders make them, and the FHA insures them. HECM borrowers must be at least age 62.
One recent change requires lenders to perform a financial assessment on all HECM applicants. A credit check and cash flow analysis must be included.
That's to make sure borrowers can afford to maintain the house backing the loan. The borrowers still own the home, so they must continue paying property tax and insurance premiums. They also must pay for repairs and upkeep.
Applicants with questionable finances may be denied an HECM. Or they may be required to set some of the loan proceeds aside to cover costs. So HECMs can be difficult to get.
Age-Old Concerns
A recent change may encourage married couples to seek HECMs. Here's the background:
The amount that you can borrow with an HECM depends on several factors, including the borrower's age. Older HECM borrowers can get more cash than younger ones.
The older the borrower, the shorter the life expectancy and the sooner the lender can expect to be repaid. So loans for older borrowers tend to be larger.
For that reason, some married couples borrow only in the name of the older spouse in order to increase the amount they'll receive.
This strategy has posed problems when the older spouse (who is the only official borrower) dies.
Then the surviving spouse, not named on the mortgage, would have to repay the loan, including the outstanding interest, usually promptly. Failure to repay could result in foreclosure.
Under pressure, the federal government changed the rules in 2014. Now a nonborrowing surviving spouse can remain in the home if certain conditions are met.
The nonborrowing spouse must be named on the loan documents, for example. And he must have a legal right to remain in the home.
The survivor also must agree to all the borrower's obligations described in the loan documents. Assuming that everything has been done correctly, loan repayment remains deferred until the survivor dies, moves or sells the house.
Another type of HECM, the HECM for Purchase, lets seniors buy a primary residence they're not living in. These loans, known as H4Ps, have their own rules. They may appeal to retirees who want to downsize or relocate.
Seniors shouldn't shift into a reverse mortgage without careful planning. Multiple fees are involved, and they can add up, crimping your retirement . You should expect to remain in the home for several years to make paying reverse mortgage costs worthwhile.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
