Recently we sat down with Barbara McDowell, reverse mortgage specialist for Bank of the Pacific, to talk about reverse mortgages. And there’s a lot to learn!
This is the last of our four-part series on the topic and we’d like to share an example and then have Barbara answer some frequently asked questions.
One of McDowell’s very happy customers, Carla, explains how she successfully used a reverse mortgage to solve her financial dilemma.
“Having been forced into retirement at 62, I knew that collecting Social Security that early wasn’t going to solve my financial problem (that is paying my mortgage and all the other bills). But I was positive a reverse mortgage was going to be the solution I needed,” Carla said.
Of the options the reverse mortgage program offered, Carla chose the option of taking out a set amount of money a month for a certain number of years.
“In my case, eight was the magic number that would get me to age 70 so that I could collect the maximum Social Security payment possible for the rest of my life,” Carla said.
The end result for her is that when she turned 70 last year, she began collecting Social Security at twice the amount that she would have collected if she had started at 62.
“With my final disbursement in February of this year, the loan will simply continue to accrue interest until such time as it gets paid off – when I sell or die, whichever comes first.”
And, because Carla’s reverse mortgage was used for her expenses those eight years, she was also able to reduce the amount she withdrew from her IRA by more than two-thirds!
“This ensures that I will be able to meet my second goal which is to live comfortably and not outlive my money,” she said.
The reverse mortgage gave her yet another bonus: “After eight years and despite the housing crash, property values have again risen and I have almost as much equity in my home as when the loan was funded in 2008!”
Q: What is a Reverse Mortgage?
A: It is a unique loan that enables a senior homeowner to convert part of their home’s equity into cash or income, without the requirement of making monthly mortgage payments. The loan is repaid when the borrower no longer lives in the home. The borrower cannot default on the loan or be forced to move as long as they live in the home, pay their property taxes and insurance and maintain the home.
Q: What qualifications are needed?
A: The homeowner must be 62 or older and is subject to a credit check. The home must be used as the primary residence. Also, the borrower must keep current on property taxes and insurance as well as continue to maintain the home.
Q: Does the lender own the home?
A: No, in a reverse mortgage the homeowner retains the title and ownership during the life of the loan and can choose to sell the home at any time.
Q: Can the home have an existing mortgage?
A: Yes. In fact, many borrowers use the reverse mortgage to pay off any existing mortgage and eliminate those monthly mortgage payments.
Q: How much money can I get from a reverse mortgage?
A: The amount is determined by three things: Age of the youngest spouse, value of the home and current interest rate. For example, a 75-year-old with a home appraised at $250,000 with today’s expected interest rate would have access to about 61percent of their homes equity. That means he/she could borrow $153,500 without a mortgage payment. Remember, that gets paid in the end when you move, sell or die.
Q: How can I receive the money from a reverse mortgage?
A: Money may be received in a lump sum, as monthly payments or through a line of credit as well as any combination of these options.
Q: Do I have to pay taxes on the proceeds from the reverse mortgage?
A: Because the money you receive from a reverse mortgage is a loan, it is not considered income and is therefore not taxable. Generally the loan proceeds will not affect your Social Security or Medicare benefits. However, make sure to consult your financial and/or tax advisor and appropriate government agencies to ensure that is the case for you.
Q: How can I use the money?
A: Once any existing mortgage or lien has been paid off, the net loan proceeds from your reverse mortgage can be used for any reason. Many borrowers use the money to supplement their retirement income, defer receiving Social Security benefits, pay off debt, pay for medical expenses, remodel their home or help their adult children. You worked hard for this asset and prudence, along with budgeting, should be the proper approach to enjoying proceeds received from your reverse mortgage loan.
Q: Is a reverse mortgage safe?
A: Reverse mortgages are insured by the Federal Housing Authority and the Department of Housing and Urban Development (FHA/HUD). If something happens to your lender, HUD would take over the loan and become your reverse mortgage servicer.
Q: What is the downside of a reverse mortgage loan?
A: Because the borrower makes no monthly payments, the interest on the reverse mortgage loan will accumulate, increasing the balance that is owed. Depending on when you sell or move, you may have less equity or no equity left in your home. However, the law now protects the borrower and their heirs from ever owing more than 95 percent of market value of their home at the time the loan becomes due.
Q: Do only low income people use reverse mortgage loans?
A: The perception of the reverse mortgage loan as an option for a low income borrower is changing. Many affluent senior borrowers with multi-million dollar homes and healthy retirement assets are using reverse mortgage loans as part of their financial and estate planning.
If we haven’t answered them here, direct your questions about reverse mortgage loans to your financial adviser.
Barbara McDowell is a reverse mortgage specialist, NMLS# 413842 with Bank of the Pacific. 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 executivedirector. 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 at710 E. Market St. in Aberdeen.