Our home is generally our most significant asset and the first thing we think of leaving to our adult children in our will. But are you aware that you may be able to pull cash out of the equity in your home right now? Enter the Home Equity Conversion Mortgage (HECM), commonly known as the reverse mortgage. The reverse mortgage is a unique loan instrument created by the government more than a quarter of a century ago to help Americans 62 years and older stay in their homes and maintain their standard of living in retirement. Here’s what you and your adult children should know about it:
- Single family dwellings, qualified condominiums, townhouses, manufactured homes, and 2-4 owner-occupied residences are eligible.
- You retain ownership of the home.
- You pay off your mortgage with the new loan and stop making monthly payments.
- There are different rates for different options and different ages.
- You may be able to obtain a reverse mortgage even if you don’t qualify for other, more conventional loans.
- You can take the money as one lump sum, a monthly payout, or a line of credit to be accessed at will.
- The money is not considered income, so it comes to you tax-free.
- There are no restrictions on how you spend it.
- The lender cannot collect more than the value of the home and cannot go after the rest of the estate or your heirs’ other assets for payment.
- You can stay in your home even after the loan runs out, although you are still responsible for taxes, insurance, and upkeep.
There are stigmas associated with the reverse mortgage, which is often why homeowners don’t investigate it or, if they do go ahead, don’t tell their children. These stigmas include: It’s for poor people (shame); The kids will think I didn’t plan adequately for retirement (embarrassment); and They’re going to be mad at me because their inheritance will be diminished (hard feelings). According to Gayle Nagy, executive loan advisor at RPM Mortgage, “Yes, the heirs often are upset when they learn their parents will be drawing down the equity in their home, but I say to them, ‘Well, your folks can’t afford the monthly mortgage payment of $1,500. Do you want to cover that?’ Since many adults in the ‘sandwich generation’ are coping with their own kids’ expenses, especially college costs, the answer is a resounding ‘no!’ They quickly see the beauty of the reverse mortgage.”
Gayle recommends that your adult children confer with your mortgage broker to allay their fears and educate them as to what they have to do as heirs relative to the property. By law they will be required to act swiftly to prevent foreclosure once the last borrower has passed away. Within 30 days, in fact, they have to be in touch with the lender, in writing, to communicate their plans for selling, refinancing, or abandoning the property. They will need certain paperwork to avoid snafus, so do them a favor, find out what will be required, collect it ahead of time, then let them know where it is.
“When I was initially approached by a client to do a reserve mortgage six years ago, I had the same misconceptions, fears, and concerns as everyone else,” says Gayle Nagy. “But I educated myself about its many nuances, and I’ve now done about 50 of these transactions. Although each situation was unique, I’m pleased to report that every one of them had a happy ending.”
Gayle Nagy has been a California mortgage broker for over twenty years. She can be reached at firstname.lastname@example.org.
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