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‘Loan of last resort’ may be key to gaining income for a lifetime
By Alan P. Weiss, CFP®, CPA
Published in the December 11, 2011 New Haven Register
Call it “the loan of last resort.”
As more workers enter retirement relying on cash from a 401k plan or similar account instead of a company pension, fears are growing that some could mismanage their money and outlive their savings.
Typically viewed as the retirement income source of last resort – due in large part to its fees – the reverse mortgage has gained little traction over the years. However, the release of the reverse mortgage known as the Home Equity Conversion Mortgage (HECM) last year – largely intended to make the up-front costs of reverse mortgages more palatable for consumers and the ongoing shift of baby boomers trying to afford retirement – is bringing reverse mortgages back to the fore.
A reverse mortgage is a form of loan, secured against a primary residence, that allows for borrowers to receive monies without being required to make ongoing monthly payments of those amounts. Unpaid interest simply accrues on top of the outstanding balance of the mortgage.
A reverse mortgage is structured as a “non-recourse loan.” This means that in the event the loan balance actually exceeds the value of the property, the lender has no recourse to the borrower beyond claiming the entire proceeds for the sale of the property as collateral. The lender cannot attach other assets of the borrower, or his or her estate (or heirs) after death.
The reverse mortgage remains in place until a triggering event occurs. Such events include death, ceasing to use the property as a primary residence (either due to sale of the property, and/or changing primary residence to another location), or failing to take care of and maintain the property. Thus, in practice, as long as the individual remains the owner and resident of the property, and takes care of it appropriately, the loan can be continued without any repayments until death (or, in the case of joint spousal ownership, until the second borrower’s death), however long that may be.
As a part of the requirement promulgated by the U.S. Department of Housing and Urban Development to obtain a reverse mortgage, all prospective borrowers must go through a counseling program. The borrower must initiate the outreach to the counseling program and receive a certificate to affirm that the program has been completed. Counseling can be completed in-person or over the telephone, and typically takes approximately one hour.
Also, the HECM counselor must review the client's financial information, including income, expenses, assets and debt. Alternative options, ranging from renting out part of the home for income, to taking on family members to split household expenses, to downsizing and moving, must be discussed, along with any other local programs that may be available to help those in severe need. In addition, the counselor must discuss the financial implications the reverse mortgage itself might have, including the long-term financial impact of accruing mortgage interest against what would otherwise be an estate left to heirs, and the impact of any social programs (For instance, money received from a reverse mortgage and spent every month does not count against qualifying for Social Security income).
But if you qualify, “the loan of last resort” may be a way to lock in income for a lifetime.
(Alan P. Weiss is the president of Regent Wealth Management Group in Woodbridge. He is also a CERTIFIED FINANCIAL PLANNER™ and a certified public accountant. Readers are reminded that certain investments and investment strategies may not be appropriate for them and that all investments involve risks and uncertainties. Consult an expert of your choosing if you have questions about investments. More information is available at www.regentwealth.com.)