Wednesday, June 21, 2017

Reverse Mortgages for Now-and-Later Estate and Retirement Planning

Many times, lawyers are asked by clients about financial decisions before they are made, and sometimes we’re told about them after they’ve already occurred.  One example of such a decision concerns reverse mortgages.  Reverse mortgages are home loans also known as home equity conversion mortgages, or HECMs (pronounced Heck-ums). HECMs, as bankrate.com explains, allow seniors aged 62 and older to access some of the equity in their homes without having to move.  At Geyer Law, clients will often discuss the wisdom of using a reverse mortgage as part of their retirement planning.  Other times, new clients will inform us that they’ve already entered into a HECM arrangement.

“The HECM is a safe plan that can give older Americans greater financial security,” says Ben Carson, Secretary of the U.S. Department of Housing and Urban Development. In answer to the consumer question “Will we have an estate that we can leave to heirs?”, the HUD website provides the following answer: “When the home is sold or no longer used as a primary residence, the cash, interest, and other HECM finance charges must be repaid.  All proceeds beyond the amount owed belong to your spouse or estate.  This means any remaining equity can be transferred to heirs.  No debt is passed along to the estate of heirs.”

At Geyer Law, we find it important to explain to those contemplating a reverse mortgage that of course a HECM transaction lowers the value of their estate, because they themselves are using part of their assets. The same would be true were they to tap any of their assets other than home equity.  Anything you cash in and spend reduces your estate.

Reverse mortgages provide financial solutions for homeowners, including:
  • paying off debt
  • settling unexpected expenses
  • funding long term care insurance
  • funding life insurance premiums
  • improving current lifestyle
  • helping adult children and grandchildren with current needs
In the course of discussing all these different needs and wants with clients who are thinking about entering into a HECM but have not yet done so, we encourage them to, wherever possible, involve the younger family members (their heirs) in the discussion. Why? A reverse mortgage doesn’t need to be repaid until the last surviving borrower no longer lives in the home, or the home is sold. However, both parents and adult children should consider the ramifications:
  1. If the borrower doesn’t meet the tax and insurance payments or doesn’t maintain the condition of the home, the loan might need to be repaid earlier, which might impact the heirs.
  2. Once the owner has died, the heirs have six months to pay off the loan or refinance the home with a conventional mortgage. (If the mortgage balance is less than the value of the home, the heirs will be able to keep that balance.)
A HECM represents one of many tools that can help older Americans plan for their own – and their heirs’ greater financial security,” but, as with all tools, a reverse mortgage needs to be used in the right way and for the right situation.

 by Rebecca W. Geyer

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