Home as a Retirement Planning Vehicle

For most Americans, more often than not, their home represents their largest asset. So when it comes time to retire, the home plays a key role. Conventional techniques in using the home’s equity for retirement include:

o Selling the home, downsizing and using the extra cash to generate or supplement retirement income. However, this requires the retiree to leave his or her existing home and relocate away from friends and family.

o Refinancing the home using the equity to meet retirement needs. However, this, in turn, burdens the retiree with additional monthly payments.

A reverse mortgage, on the other hand, allows an individual to remain in his or her home, use the home equity, and not incur any additional monthly payments. Being the only limitation, the FHA conventional loan cap also represents the maximum home value that can be used in computing the allowable reverse mortgage. Thus, as the home’s value increases and exceeds that limit, the benefits of a reverse mortgage may diminish.

Eligibility Requirements

Generally, there are no income requirements since the loan is based on the home equity and the borrower’s longevity.

• Age – Homeowner(s) who are at least 62 years of age and occupy the property as their principal residence are eligible. Note: All individuals on title must be at least 62 years of age. Thus, a younger spouse (under age 62) on the title would make the couple ineligible.

• Type of Homes - Eligible properties include single-family homes, condominiums, town homes and two to four dwelling units.

• Existing Mortgages - Generally, the home must be owned free and clear (or only have a small remaining balance that can be paid off with the reverse mortgage).

• Eligibility Certificate - Borrowers are required to obtain an eligibility certificate issued after receiving a free HUD-approved counseling session (discussed later).

• Asset or Income Requirements - There are no asset or income requirements on borrowers to qualify for HUD's reverse mortgages.

How much cash can someone receive?

The amount that can be borrowed is based on a HUD formula that factors in the age of the youngest homeowner, the interest rate, appraised value, and the county where the property is located. Based on a loan at current (at the time this was prepared) low interest rates, a 65-year-old with a home value of @ $400,000 living in Los Angeles County, could qualify for a loan payout of @ $170,000. At age 75, it would increase to @ $214,000 given the same parameters. An 85-year-old could qualify for @ $259,000 while a 95-year-old could get the max payout of $ 296,000 --- up to the FHA loan limit for each city and county. These limits change from time to time, and the FHA loan limit currently is $362,790 in most major metropolitan areas.

Loan Options

• Tenure Plan: Best described as a life annuity. You can receive equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence. In other words, the tenure payment will continue to be the same amount for the borrower’s lifetime, even if the loan exceeds the equity in the home or if the home declines in value.

• Term: Receive equal monthly payments for a fixed period of months selected by the borrower.

• Line of Credit: Establish a line of credit that the borrower can draw on at anytime in any amount up to the maximum principal limit.

• Lump Sum: Take all or any part of the loan at the time of closing.

• Modified Tenure: A combination of a line of credit with monthly payments for as long as the borrower remains in the home.

• Modified Term: A combination of a line of credit with monthly payments for a fixed period of months selected by the borrower.

• Loan Restructures: Homeowners whose circumstances change can restructure their payment options for a nominal fee of $20.

Possible Uses

Funding for Healthcare or Long-Term Care Insurance - Most Americans recognize the need for a long-term care insurance program to protect both their assets and relieve any potential burden on their family. Many seniors, when faced with this situation, are forced to use their savings or impact their monthly income for long-term care coverage.

A reverse mortgage allows seniors to stay in their homes, be self-sufficient, and not deplete existing savings or income. An elderly person could use a reverse mortgage to fund the purchase of a prepaid long-term care insurance policy without reducing their current income or depleting their non-housing assets.

Provide Funding for Estate Taxes - When the tax-free equity release is used to fund life insurance products, a reverse mortgage is a creative and effective way to secure the future for heirs. It gives homeowners, particularly those with substantial wealth built up in their homes, the comfort of having more control over their estate and assuring the legacy they leave retains its value by:
• Lowering the total estate value subject to taxes.
• Providing life insurance for the homeowner’s heirs to pay estate taxes.

Enhance Income – In 2004, the average income of men aged 65 and over was $28,000 and $15,000 for women. Tapping the equity in their home can help millions of house rich and cash poor seniors supplement their income.

Modifying the Home for Elderly Hazards - Many seniors are without the financial means to modify their homes and vehicles for age-related issues such as ramps, bathroom fixtures, lifting devices, medical beds, safety devices, etc. Proceeds could even be used to fund in-home care.

Reverse Mortgage an Alternative to Nursing Home - It is often desirable for an elderly person to remain in his or her own home with proper in-home care rather than entering a nursing home. A reverse mortgage loan may make this a feasible alternative to a nursing home. If this approach is taken, don’t forget the household help is deductible in the same manner as the nursing home. Also, household employees must be paid by payroll.

Please call this office if you have additional questions.