reverse mortgage (you may have heard the term HECM, standing for Home Equity Conversion Mortgage).
“If you are a homeowner age 62 or older and have paid off your mortgage or paid down a considerable amount,” The U.S. Dept. of Housing and Urban Development website explains, “you may participate in FHA’s Home Equity Conversion Mortgage program.”
At Geyer Law, we were particularly interested in reports of a new study published in the Journal of Financial Planning. For “house-rich” clients, the researchers learned, where the value of their home was double that of the value of their retirement savings, having those clients take a stream of income out of a reverse mortgage’s credit line substantially increased inflation-adjusted retirement income through a 30-year retirement period.
What is especially interesting about this paper is that most retirees who choose to take reverse mortgages have tended to use the reverse mortgage credit line as a backup, or “last resort” in case they were run out of money in the later years of their retirement. In this article, authors Neuwirth, Sacks, and Sacks advocate using income from a reverse mortgage as a planned component of retirement income.
At the same time, our estate planning attorneys find it important to explain to those contemplating a reverse mortgage that a HECM transaction lowers the value of their estate because they themselves are using part of their assets.
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. Both parents and adult children should consider the ramifications prior to entering into such an arrangement:
by Rebecca W. Geyer