In the last two columns we’ve been talking about reverse mortgage loans as a possible financial tool for those homeowners 62 years old and older.
Not only are there new safeguards – both for the lender and the homeowner – but people are also finding a variety of creative ways to use reverse mortgages as part of their financial strategy.
Barbara McDowell, a reverse mortgage specialist for Bank of the Pacific, let us in on the variety of ways people are using reverse mortgages.
WHAT IS A REVERSE MORTGAGE?
For those of you just joining our discussion, and as a reminder to the rest, here is McDowell’s definition of a reverse mortgage:
“A reverse mortgage is a financial tool that turns your home equity into cash, which can be used for any purpose you decide. Unlike a traditional mortgage, you do not make monthly payments. And, no repayment is due as long as you live in the home, pay your taxes and insurance and maintain the home according to the Federal Housing Administration (FHA) requirements.”
To be eligible for a reverse mortgage, a homeowner must be 62 years or older, have at least 50 percent equity in their home and have credit history reviewed for ability to pay property taxes and home insurance.
Depending on your age, a specific percent of the equity can be made available – a higher percent the older someone is. For instance, someone 62 years old has access to about 52 percent of their home’s equity, while someone 75 years old has access to about 61 percent and someone 90 years old has access to 75 percent.
OTHER USES FOR A REVERSE
Here are nine ways to use a reverse mortgage. Perhaps one of them might be a good use for you or a relative. As in all financial matters, a person’s unique situation should be considered. The following list gives you some possibilities to discuss with your financial consultant and/or tax advisor.
1. Pay off an existing mortgage – Using a lump sum from a reverse mortgage to pay off a traditional mortgage balance instantly increases a retiree’s monthly cash flow and reduces portfolio withdrawal needs.
2. Replace a home equity line of credit – A reverse mortgage can never be reduced, frozen or cancelled and there are no monthly loan repayments. Money from a reverse mortgage can pay for home repairs or just make cash available as an easy-to-access line of credit.
3. Protect your portfolio – If your investment portfolio declines significantly in value, you could use a reverse mortgage line of credit for monthly expenses for a while, repaying the loan when your portfolio recovers. Also, interest payments that are paid are tax-deductible if you itemize on your income tax return. Please consult your tax advisor.
4. Fund future long-term care or income needs – Some senior couples who don’t have long-term health care insurance may want to set up a reverse mortgage line of credit. Left untouched, the equity line could substantially grow in 10 years. And, if needed, the couple could tap the loan for future long-term care costs, as long as one remained in their home or they are not out of the home for more than 12 consecutive months.
5. Create a Social Security bridge – You can use income from a reverse mortgage to take care of your living expenses for a few years and thus put off initiating Social Security payments. This would provide an income bridge to allow a retiree to delay claiming Social Security until benefits are worth the maximum amount at age 70.
6. Manage taxes – Proceeds from a reverse mortgage are tax-free. Tapping a reverse mortgage can decrease withdrawals from taxable retirement accounts, thus reducing income taxes and the amount of Social Security benefits subject to income taxes. For higher-income retirees, tax-free reverse mortgage payments can reduce their modified adjusted gross income that can trigger higher monthly Medicare premiums.
7. Pay Roth conversion taxes – Sometimes the only thing preventing a retiree from converting a traditional retirement account to a Roth IRA is the amount of income tax owed on the converted amount. Tax-free proceeds from a reverse mortgage can pay Roth conversion taxes all at once or over several years, reducing future income taxes and possibly reducing future Medicare premiums.
8. Buy a new home – A reverse mortgage can be used to purchase a new home. Rather than using all the proceeds from a home sale, downsizers can use some of the sale profits and take out a reverse mortgage to make up the balance, resulting in a new home without monthly payments as well as additional cash to add to savings for future needs.
9. Divorce strategy after 62 – Older couples can use a reverse mortgage to divide a marital housing asset in a divorce. In one scenario, the spouse remaining in the home can take a lump sum distribution from a reverse mortgage to buy out the other spouse.
SUMMING IT ALL UP
As you can see, a reverse mortgage can be used in a variety of ways to save money, allow you to stay in your home, and even lower your taxes.
However, McDowell emphasizes that it isn’t something to be entered into lightly and that it is critical to understand the implications when you sign on the dotted line.
NEXT WEEK STILL MORE
Next week we’ll tackle some frequently asked questions about reverse mortgages. In the meantime, if you have questions, contact your reverse mortgage specialist or Barbara McDowell at Bank of the Pacific (360) 441-5794.
Barbara McDowell is a reverse mortgage specialist, NMLS# 413842, with Bank of the Pacific, Member FDIC and an Equal Housing Lender. A reverse mortgage is subject to credit approval.
Dave Murnen and Pat Beaty are construction specialists at NeighborWorks® of Grays Harbor County, where Murnen is the executive director. This is a non-profit organization committed to creating safe and affordable housing for all residents of Grays Harbor County.
Do you have questions about home repair, renting, remodeling or becoming a homeowner? Call us at 533-7828, write us or visit us at 710 E. Market St. in Aberdeen.