Using a Reverse Mortgage to Increase Income and Pay Debt

August 21, 2018 | by the National Care Planning Council

For many seniors the equity in their home is their largest single asset, yet it is unavailable to use unless they take out a home equity loan. However, a conventional loan really doesn't free up the equity because the money has to be paid back with interest. A reverse mortgage is a risk-free way of tapping into home equity without creating monthly payments and without requiring the money to be paid back during a person's lifetime. The home must be free of any liens or mortgages but reverse mortgage funds can be used to clear these debts. Instead of making payments, the cash flow is reversed and the senior receives payments from the bank. Thus the title "reverse mortgage".

Many seniors are finding they can use a reverse mortgage to pay off an existing conventional mortgage, to create money for a down payment for a second home or to pay off debt. Popularity of this product is skyrocketing! Over the last few years the number of reverse mortgages nationwide has mushroomed. The uses of this untapped wealth are only limited by a person's imagination.

For those seniors who are "equity-rich but cash-flow poor," a reverse mortgage can allow them to remain in the home by creating extra income. It can also allow for remodeling or repairs and when the time comes to sell, the investment in the home can make it more valuable.

A reverse mortgage is a loan against the equity in your home that provides cash advances, but requires no mandatory monthly re-payments during the life of the loan. If the interest is unpaid, it is allowed to accrue against the value of the home. The choice to pay any portion of the interest, might be deductible against income, as would any mortgage interest.

The applicant and or the spouse must be at least 62, own and live in the home, as a primary residence. A home [1-4 family residence, condominium, co-op, permanent mobile home, or manufactured home on a foundation] all typically qualify for a reverse mortgage.

There are no income, asset or credit requirements. It is the easiest loan to qualify for. On the other hand, a reverse mortgage is very much the same as a conventional mortgage. As an example:

• The bank does not own the home but owns a lien on the property just as with any other mortgage
• The continues to hold title to the property as with any other mortgage
• The bank has no recourse to demand payment from any family member if there is not enough equity to cover paying off the loan
• There is no penalty to pay off the mortgage early

The proceeds from a reverse mortgage are tax-free and available as a lump sum or as fixed monthly payments for as long as the recipients live in the property, or available as a line of credit; or a combination of all three of these options. These proceeds can be used for any legal purpose such as:

• daily living expenses
• home repairs and improvements
• medical bills and prescription drugs
• pay-off of existing debts
• education, travel
• long-term care and/or long-term care insurance
• financial and estate tax plans
• gifts and trusts
• to purchase life insurance
• or any other needs.

The amount of reverse mortgage benefit will depend on

• the age of the youngest person on the title (must be at least 62),
• the reverse mortgage program chosen,
• the value of the home,
• current interest rates, and
• for most products, the geographical location.

As a general rule, the older a person is and the greater the equity, the larger the reverse mortgage benefit will be (up to certain limits, in some cases). The reverse mortgage must pay off any outstanding liens before it will be approved.

The loan is only due and payable if the borrower no longer occupies the home as a principal residence (i.e. the borrower sells, moves out permanently or passes away). At that time, the balance of borrowed funds is due and payable. All additional equity in the property belongs to the owners or beneficiaries. The mortgage company generally provides a grace period to allow the home to be sold.

The HECM (Home Equity Conversion Mortgage) underwritten by the government is the most common loan. Over 90% of all reverse mortgages are HECM contracts.

The costs associated with getting a reverse mortgage are similar to those with a conventional mortgage, such as the origination fee, appraisal and inspection fees, title policy, mortgage insurance and other normal closing costs. With a reverse mortgage, all of these costs will be financed as part of the mortgage prior to withdrawal of additional funds. A reverse mortgage does not require any out-of-pocket costs for the aforementioned fees. In contrast these fees are typically not covered by funds from a conventional mortgage.

The borrowers must participate in an independent Credit Counseling session with an FHA-approved counselor. The counselor's job is to educate about all of the mortgage options. This counseling session is at no cost to the borrower and can be done in person or over the telephone. After completing this counseling, the borrowers will receive a Counseling Certificate either at the session or in the mail. This certificate must be included as part of the reverse mortgage application.

Keeping money in a reverse mortgage line of credit will not count as an asset for Medicaid eligibility as this would be considered a loan and not a resource for Medicaid spend down. However removing the money from the account and transferring the money to an investment or to a bank account would represent an available resource and would trigger an asset spend down requirement before prior to receiving Medicaid assistance.

If a senior homeowner chooses to repay any portion of the interest accruing against his borrowed funds, the payment of this interest may be deductible (just as any mortgage interest may be). It should be noted however, the lender is not anticipating any payments during the life of the loan.

A reverse mortgage loan will be available to a senior homeowner to draw upon for as long as that person lives in the home. And, in some cases, the lender increases the total amount of the line of credit over time. If a senior homeowner stays in the property until he or she dies, his or her estate valuation will be reduced by the amount of the debt. The children will receive the balance of the equity.