Wednesday, April 11, 2018

Seniors Can Move and Buy, Using a Reverse Mortgage

“The HECM is a safe plan that can give older Americans greater financial security,” is the way Ben Carson, U.S. Housing and Urban Development Secretary puts it. Carson is referring to reverse mortgages, which allow seniors aged 62 and older to access some of the equity in their homes without having to move.

But, as Marcia Honz of Finance of America Reverse explained in a recent lecture to the Financial Planning Association, “reverse mortgage financing” can be used in a number of other creative ways to help seniors improve their own lifestyles while still fulfilling their planning goals. In fact, a reverse mortgage can be a tactic for seniors who want to move into a new home.

At Geyer Law, when we’re advising clients on their estate planning, we explain that a HECM transaction has the power to lower the value of their estate (since they themselves are using part of their assets during their lifetime). On the other hand, we find that seniors are often choosing to relocate in order to be closer to children and grandchildren. Using a HECM (Home Equity Conversion Mortgage) for Purchase allows them to buy a new home or condo without taking on a monthly mortgage payment.

Borrowers who qualify for a HECM for Purchase loan, bankrate.com explains, include those who:
  • are at least 62 years old
  • will be using the home as their primary residence
  • are able to pay the property taxes, insurance premiums, homeowners’ association dues, and maintenance costs
Does the reverse mortgage cover the entire cost of the home? No. The loan typically covers only 38-71% of the new home’s purchase price. The variation is dependent on several factors, including:
  • age of the borrower and his/her spouse
  • current interest rates
  • appraised value of the home
  • the mortgage insurance program

The buyer must come up with the rest of the purchase price from sale of a former home, retirement accounts, or savings.

What can be good for a senior about financing the purchase of a new home using a reverse mortgage? The HECM allows older Americans to buy a house or condo that better suits their needs without dumping all their retirement assets into it, and without dipping into their monthly fixed income.
  • seniors unable to navigate stairs may want to move to a one-story home
  • seniors may choose to move closer to their medical providers
  • seniors may choose to move closer to their family members
What can be not-so-good about a reverse mortgage home purchase?
The senior loses equity in the second home, rather than building equity, Kiplinger.com points out. When the owner moves or dies, whatever is left in equity after paying off the reverse mortgage - and there may well be only a small amount left, since the loan in accruing compound interest – is the part remaining in the estate.

As an Indiana estate planning and elder law firm, our goal is to offer a full range of options for families facing changing circumstances. Planning for seniors involves so much more than wills, trust, and other estate planning documents. Our work is all about is helping seniors improve their own lifestyles while still fulfilling their estate planning goals   

- by Ronnie of the Rebecca W. Geyer blog team

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