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By Liza Horvath


Reverse Mortgages as a Financial Planning Tool


Frank and Shari have been responsible in planning for retirement. They saved, invested prudently and took advantage of the 401(k) retirement plans offered through their employers. Now in their 70s, Frank and Shari enjoy a comfortable retirement. Frank golfs often and Shari plays tennis with friends several times a week. Part of their planning included paying off their home mortgage with the idea that, should they ran out of cash, they could obtain a reverse mortgage.


Like most seniors, Frank and Shari want to remain in their home forever. Their thoughtful planning is impressive, no doubt, but does a reverse mortgage really fit into a financial plan? Planning, whether financial or legal, is more likely to be successful if you consider all possible options and develop strategies to deploy should something go off course.


Over the years, the reputation of reverse mortgages has suffered and maybe that contributed to the name change – they are now referred to as a “home equity conversion mortgage,” or HECM, for short. If you forget the acronym, just think, “What the heck, em?” Along with the new name have come new options and, maybe more importantly, enhanced governmental oversight in partnership with HUD and FHA.


Should you consider a HECM as part of your financial plan? What about a traditional mortgage or line of credit? All offer good solutions but there are differences – which are significant. In a nutshell, a HECM  is easier to qualify for than a traditional loan and you do not have to make monthly repayment of the money you borrow – both positives. The upfront costs, however, are much higher than those of a traditional mortgage or line of credit. Another important aspect to consider are the differing “maturity events” that trigger your obligation to repay the loan.


To qualify for a traditional mortgage or line of credit, banks and other lenders require that you have sufficient income to make monthly payments. In Frank and Shari’s situation, they intend to use a HECM as a last resort so presumably all their funds will be depleted. They would not qualify for a traditional loan at that time.  To qualify for a HECM, you must be age 62 or older and your primary residence would be used to secure the loan. When you apply, the lender considers your life expectancy, your home’s value and the current lending rates. From there, they determine how much they can lend. The cash can be received in one lump sum, monthly draws or can be used as a line of credit wherein you would draw funds as needed.


The triggering events for loan and HECM repayment differ, as well. For a HECM, if the borrower dies, sells or abandons the home, the loan must be paid. HECM lenders also require that you pay the property tax, insurance and maintain the home. With a traditional home mortgage, default on payments is generally the only triggering event. If you die and leave your home to a child, with some exceptions the Gran St. Germain act of 1982 allows the loan to stay in place as long as the payments are kept up. Not so with a HECM loan.


Frank and Shari were smart and thorough in their planning and, at least in their case, having a HECM as a backup is perfect. Educate yourself – is a mortgage, line of credit or a HECM a good tool for you?  

Liza Horvath has over 30 years experience in the estate planning and trust fields and is the president of Monterey Trust Management, a financial and trust management company. This is not intended to be legal or tax advice. If you have a questions call (831)646-5262 or email liza@montereytrust.com










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