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Saturday, May 25, 2019

So the question is, when I say eligible, what do I mean? Eligible as in bachelor or bachelorette? Eligible to win a raffle? As a mortgage banker, when I use the word eligible I’m referring to something that normally you would have to be at least 62 years of age in order to qualify, but now you can be eligible to qualify even if you’re 60. I am referring to none other than the reverse mortgage financing product. Yes, today there is now a financing tool that is a reverse mortgage in which you can be 60 instead of 62.

Just what exactly is a reverse mortgage?

A reverse mortgage is a way for borrowers age 62 or older, and some products now available for 60-year-olds, to purchase a property or unlock the equity in their home by turning it into tax-free cash (consult with your tax adviser) without having to make any monthly mortgage payments (real estate taxes and insurance must still be paid). How do you qualify?

  1. The borrower on title must be the minimum required age (a non-borrowing spouse may be under age 62).
  2. The home must be the borrower’s primary residence.
  3. The borrower must own and live in the home as a primary residence.
  4. Borrowers must continue paying property taxes and homeowner’s insurance, maintain the home, and otherwise comply with the loan terms.

Strategic uses of a reverse mortgage for retirement planning:

  1. Delay Social Security benefits and let investments grow. Determining when to take Social Security is one of the most important decisions a retiree can make because it’s lifetime income. You can use reverse mortgage proceeds to delay taking Social Security benefits for as long as possible, allowing you to receive a greater monthly income in the future.
  2. Protection from investment downturns. A reverse mortgage may help minimize risk in retirement during your investment portfolio’s volatility cycles; the strategy would be to take a reverse mortgage after 62 years of age, but only drawn upon it if the portfolio underperforms to allow a recovery.
  3. Grow retirement with the HECM growing line of credit. The reverse mortgage unused portion of the line of credit grows at an interest rate that is equal to the current loan rates. This line of credit also includes a compounding feature so that available credit increases each period on the prior period’s available credit balance. At any time, the line of credit can be accessed for incidental cash or even converted to monthly term or tenure payments, similar to annuity payments.

Using these active strategies, cash reserves are made available upfront and incorporated into a plan, giving your portfolio the maximum amount of time to grow and the best-possible chance of survival. You can still live in your home without making monthly mortgage payments, feel confident about being financially prepared for emergencies, have a growing line of credit available to you while improving your Social Security opportunity—all while maintaining your desired quality of life. Simple and effective.

Important Consumer Safeguards

There is no prepayment penalty.

Non-recourse loan HECMs are considered nonrecourse loans. Neither you nor your heirs will ever owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt.

Major change! Non-borrowing spouse is a spouse under the age of 62. New loan amounts are available to borrowers with a non-borrowing spouse under the age of 62. New rules also allow the eligible spouses, under 62 years of age, of borrowers who pass away to stay in the home without foreclosure. The surviving spouse must continue to pay taxes, homeowner’s insurance, home maintenance, and otherwise comply with the loan terms.

Although reverse mortgages are available, no one strategy fits all. Around the 60-year-old mark, many people think about downsizing and either renting or buying a smaller house. One of my favorite strategies is buying a smaller home with a low down payment and short amortization span like a 10- or 15-year mortgage. The strategy I am presenting makes the most financial sense at around 55 plus. The ideal game plan is to have a monthly payment equal to comparable rent, but you get the benefit of building equity and the possibility of an interest deduction. Renting, if you have a below-market rent, may be financially beneficial, and you can pass maintenance off to a landlord, but dollar for dollar, the small-home strategy offers the forced retirement kicker you just may need.

Ideally you want to compare the rental on an apartment with the rooms you want to a home with the rooms you want, and tweak so that the payments are close for the best financial results. You can tweak the numbers and find lower purchase prices (or higher if you are in the luxury market) to fit the rental comparisons, but let’s crunch the numbers using an average three-bedroom family home. (I wanted to be conservative so I used a $450,000 purchase price, but for a $3,000 rental comparison, I believe a $350,000 purchase price with 5 percent down is the sweet spot):

A) Purchase price: $450,000, let’s say a three-bedroom

5 percent down payment: $22,500

Estimated payment on a 15-year loan: $4,285.45 (principal and interest $3,135.45, taxes $1,000, hazard insurance $150)

B) Purchase price: $450,000, let’s say a three-bedroom

10 percent down payment: $45,000

Estimated payment on a 15-year loan: $4,120.43 (principal and interest $2,970.43, taxes $1,000, hazard insurance $150)

C) Estimated rent: $3,000

Obviously you can shoot for a smaller home at a lower price, depending on the area. To be conservative, let’s use our (A) example above at the 5 percent down. You will see what you would wind up with in 15 years on a comparative basis not factoring any tax benefits, which would only enhance the end results.

Total payments on (A) over 15 years: $771,381 plus the down payment = $793,881 (does not take into consideration maintenance).

Total payments on (C) over 15 years: $540,000 (does not take into consideration possible rent increases).

The difference between $793,881 less $540,000 is $253,881 more over 15 years, excluding net tax benefits.

Epilogue:

At the end of 15 years: if you rent, you are still paying rent, not factoring in any rent increases, and have saved $253,881 in payments compared to the 15-year scenario at 5 percent down. You pass the maintenance to the landlord and have a lower cash flow that is not to be minimized. You also have the option of reinvesting the monthly savings in an investment vehicle that may yield greater results than the appreciation in a home.

At the end of 15 years: if you own, without factoring in appreciation or possible increase in real estate taxes, you now own a home free and clear hopefully worth at least $450,000, only paying monthly estimated real estate taxes and insurance of $1,400. Should you decide to sell, your projected net gain on sale of $450,000 less $253,881of monthly savings = a net gain of $196,119. Option (A) offers you equity build-up, the ability to stay put without moving due to rent increases, and a lower monthly payment down the line. To be even more conservative, I’ll throw in $1,200 a year for general maintenance and $10,000 for upgrades and repairs, which equals $28,000. That still leaves you a projected conservative net of $168,119 (you can also deduct real estate brokers’ commission to be ultra-conservative, which may be reduced by the amount you receive due to estimated appreciation in your home, but you still wind up with some nice dough, leavened, that is). 

Sometimes you have to weigh cash flow vs. equity build-up. You may luck out and get both, but it’s your life and your decision. Not everything is simple and works out the way we plan. The best we can do is make a calculated decision and pray. Sooo, crunch the numbers, plan your future, roll the die and… pray. May God shower blessings on you and your family and may your decisions unfold the way you plan by the grace of God as we approach the holiday of freedom and redemption.

By Carl Guzman


Carl Guzman, NMLS# 65291, CPA, is the founder and president of Greenback Capital Mortgage Corp. He is a real estate mortgage banker and business financing expert with over 28 years’ experience. He currently has 174 five-star reviews on Zillow. Carl and his team will help you get the best mortgage financing for your situation and his advice will save you thousands! www.greenbackcapital.com  [email protected]