Reverse mortgage can be cure for a cash flow crunch

By JEFF LAZERSON / CONTRIBUTING COLUMNIST

2/22/2016

Baby boomers are rapidly taking on increased mortgage debt. Last week the Federal Reserve Bank of New York released a study showing average home-secured debt per 65-year-old increased 47 percent from 2003 to 2015.

Ask your mortgage loan officer. It’s scary just how few people have enough savings and income to be able to retire comfortably, especially in Orange County.

Consider the FHA reverse mortgage financing instrument (also known as home equity conversion mortgage), which you might find timely and useful if you were one of those people who never bought the winning retirement lottery ticket.

The idea is for anyone 62 or older to leverage cash or home equity by owing money on a home without having to make any mortgage payments – just pay property taxes, homeowner’s insurance and stay on top of the upkeep.

A reverse mortgage can be used to purchase a primary residence or refinance a primary residence. It can also be used as a retirement tool to defer your Social Security, IRA or 401(k) benefits until a later date as your nest egg and benefits incubate and ideally grow further.

To give you a sense of the end-to-end lending scale for a never-again house payment, a 62-year-old would have to put just over a 48 percent down payment on a purchase or have that same 48 percent in equity in the event of a refinance. Somebody 90 or older needs roughly 25 percent down or 25 percent equity.

For example, a 73-year-old could put $240,000 down (40 percent), on a $600,000 home leaving an outstanding mortgage balance of $360,000, for which no payments are made.

Reverses can be fixed rate or adjustable rate mortgages. The fixed is a one-time down payment on a purchase or one-time payoff of the existing mortgage in the event of a refinance and or cash-out depending on where you land on the age, maximum loan-to-value table. You do not have to take out the maximum if you can get by with less.

The adjustable allows you take out some money at funding and some money later. It can also act as a flexible home equity line of credit that allows you to borrow and pay back over time. And, the unused credit line grows over time, which also acts a hedge against any future home depreciation.

Be mindful that nothing is free in this world. In a reverse mortgage, interest is added to the actual borrowed balance each month, and the balance grows.

This is a non-recourse loan, meaning nobody will come after you or your heirs for a deficiency after you move out or die. Also, within one year the estate can buy back the property from the Federal Housing Administration at 95 percent of the property value. So, the heirs can keep the property and never get stuck with negative equity.

Mandatory pre-borrowing FHA certified counseling will help you decide, independent of any sales person, to understand if this is a good option for you. Counseling can cost from zero to $150.

If you have questions or comments, please contact Jeff Lazerson by clicking here.