In episode 5 of Your Wealth Curve, I had the pleasure of sitting down with Darryn Silver-Murdoch, a reverse mortgage specialist and certified senior advisor, to discuss the facts about reverse mortgage and how it can be a useful tool in your retirement plan. With over 10 years’ experience in the reverse mortgage field, Darryn helps us dispel the myths about reverse mortgages and explains who should consider this kind of lending and how it can be used to help you achieve your retirement goals.
Darryn comes to the reverse mortgage field with a unique perspective. After working as a financial futures and U.S. treasuries trader on Wall Street for 10 years, she decided that this kind of lifestyle was not what she envisioned for herself and had the desire to do something where she could be of service to people. After going back to graduate school and obtaining her masters in social work, Darryn practiced as a therapist for 12 years in New York City, specializing in counseling people with life-challenging illness. When she and her husband decided to move from Manhattan back to her hometown in New Jersey, Darryn was looking for a career opportunity that could incorporate her knowledge of finance and her experience as a therapist. Darryn was introduced to the reverse mortgage business by a friend, and this line of work has proved to be a perfect fit. Darryn is now licensed as a reverse mortgage broker in 19 states and has been in the top 10 percent nationally as a producer.
What is a Reverse Mortgage?
A reverse mortgage is a non-recourse government insured loan that converts a portion of the value of the home into tax-free dollars. You can receive this money as a lump sum, a line of credit, a monthly annuity or a combination of all. In order to be approved for a reverse mortgage, you have to be 62 years old or older, you must reside in the home as your primary residence, and you must attend a reverse mortgage counseling session with a government-certified counselor. There are many types of reverse mortgages, but for the purpose of this conversation we are focusing on the HECM, which is the government-insured home equity conversion mortgage.
The amount of money you qualify for is determined by your date of birth, interest rate and the value of your home. The interest rate used in this equation is an expected factor interest rate, meaning it is today’s rate and not necessarily the rate at which the money will be paid back. There is a $625,000 home valuation cap, meaning this is the lending limit the government will use when determining eligible funds, even if your home is valued at more. The borrower retains ownership of the home – the owner continues to hold the deed and the bank will not be placed on the title of the home. The bank can never foreclose on the home as long as the owner continues to pay taxes, pays their homeowner’s insurance, reasonably maintains the home and continues to reside there. You can get a reverse mortgage if you have a primary mortgage on your home, but any existing liens must be paid off in full at or before closing. Currently, there are no income, asset, credit score or health requirements to qualify for a reverse mortgage. Having a reverse mortgage has no effect on social security, Medicare coverage and pension disbursements. Money received from a reverse mortgage does not count as taxable income when you are filing your taxes and will not move you into a higher tax bracket.
Once your eligibility has been calculated, you can access the funds either in a lump sum (according to HUD guidelines), in monthly payments or in a line of credit. If you choose the lump sum, only 60 percent of the amount borrowed would be available in the first year, with the rest being available in subsequent years. You can choose to set up an annuity that would pay you monthly the maximum amount possible to last the rest of your life. In this case, even if the amount paid out exceeds the value of the home, the payments continue. If you choose to have the money put into a line of credit, the money grows at a rate that is 1.25 percent higher than the rate accruing interest debt. You are only charged interest at repayment for the money that is used.
How Does a Reverse Mortgage Get Paid Back?
As long as you are residing in the home, there are no payments on a reverse mortgage. If you vacate the home, whether you are making a permanent move or have to live in a health care facility, you are responsible for paying back the money you accessed plus the mortgage insurance & interest accrued. If you pass away, there are a few ways to pay back the loan. In one scenario, your heirs can sell the house and pay back the debt with interest. Another option is to keep the house by paying off the reverse mortgage by refinancing. In another scenario, the “non-recourse” part of the loan comes into play. This stipulates that no one comes out of a reverse mortgage being personally liable for more than their home is worth. If when you die your home is worth less than the amount owed, the government will pick up the shortfall, and your heirs are off the hook. If your home is worth more than what is owed, the heirs will inherit the additional money once the loan is paid.
Is a Reverse Mortgage Expensive?
There are a number of fees associated with a reverse mortgage, which is why Darryn only recommends them to people who plan to stay in their home. There is a loan origination fee, or a start-up cost for the loan. The amount is 2 percent of the first $200,000 of home value, and 1 percent of the rest. The fee is capped at $6,000. There is also a fee for mortgage insurance, which is paid so the government is able to pick up any shortfall if the amount of the loan surpasses the amount of the value of the home when the loan is due to be repaid. This is calculated depending on how much money you access – if you take out less than 60 percent of what you qualify for, the charge is ½ of 1 percent of the value of the home. If you take out more than 60 percent, the cost jumps to 2½ percent of the home’s value. Both of these fees are not paid out of pocket, rather rolled into the loan and deducted from the amount you have access to.
Reverse Mortgage as a Creative Retirement Tool
Darryn shares several anecdotes about how people can use the reverse mortgage creatively when thinking about their long-term retirement goals. In one case, she describes how one woman took out a reverse mortgage line of credit anticipating that she wouldn’t need the money for about another two years. The money then sat in the line of credit collecting equity growth. When the two years passed, interest rates had gone up and her house was valued at less, making her eligible for less money than what she initially qualified for. By activating the reverse mortgage when she did, she ended up with much more money to live on then if she had waited until the need was there.
In another scenario, Darryn explains how it is possible to use the reverse mortgage in a divorce situation if one of the spouse’s wants to stay in the home and the other wants to be bought out. People have used the reverse mortgage to avoid bankruptcy or foreclosure by accessing the available money and using it to pay off debt, and a reverse mortgage can be used to buy a second home. The most common use of the reverse mortgage is for home improvements or to pay for medical or long-term care.
When used as part of a comprehensive retirement plan, the reverse mortgage can be a very flexible and tax-beneficial way to get the funds you need to maintain your quality of life. The reverse mortgage should be explored with your financial advisor to see if it fits into your plan when you consider all the moving parts of your retirement goals.
For more information on reverse mortgage and to see how Darryn can help you, please visit her website at http://www.reverseandrelax.com/darrynmurdoch
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