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Rules limit HECM use
Almost all reverse mortgage loans today are home equity conversion mortgages, or HECMs.
What the heck is a HECM?
A home equity conversion mortgage, or HECM, is FHA's reverse mortgage loan program, enabling seniors to withdraw some of the equity in their home if they need money. These loans come with fees, including an origination fee that ranges from $2,500 to $6,000. The National Council on Aging's booklet, called "Use your home to stay at home," offers more details.
Changes in HECM rules in recent years have made it harder for seniors to use these loans to strip all the equity out of their homes and leave themselves without the means to pay their property tax and homeowners insurance.
While the newer rules can be protective, they don't guarantee a HECM is appropriate for every senior homeowner.
It's important to remember that while a HECM doesn't require monthly payments, you'll have to repay your loan if you sell your home or move out for 12 months or longer, including any fees, accumulated interest and mortgage insurance premiums.
Reverse mortgage loans also can be challenging for non-borrower spouses, adult children and others who live in the home or might expect to inherit it.
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Pay off large expenses
Perhaps the most common use of a reverse mortgage loan is to pay off an existing home loan or line of credit, or to pay off or pay down other debt, such as credit cards, a car loan or medical bills.
"Sometimes, something happens and (seniors) do run up credit card debt and start struggling to figure out how to pay that as well as living expenses. The reverse mortgage loan can help," says Beth Paterson, certified reverse mortgage loan professional at Reverse mortgage loan SIDAC in St. Paul, Minnesota.
Paying off other home loans or consumer debt with a HECM eliminates the need to use current income to make those monthly payments.
"You free up (cash) and increase your monthly income," Meehan says.
Still, there are limits as to how much this strategy can help, says Greg Cook, vice president at Reverse Lending Experts in Orange, California. If the reverse mortgage loan is "a drop in the ocean" in debt repayment, the senior might be better off selling the house, he says.
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Finance living expenses
Seniors can also use a reverse mortgage loan to supplement their income to enhance or maintain their lifestyle, such as after they retire or their spouse dies, Paterson says.
That might mean paying for necessities like medical services, home medical equipment, at-home care, dental work, home repairs or aging-in-place modifications. Or, it could mean paying for discretionary expenditures like buying new clothes or frequenting a beauty salon.
"Seniors want to stay in their home and be able to travel and go out to dinner with friends," Paterson says.
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Help with financial planning
Financial planning is another potential use of a reverse mortgage loan.
- Setting up a credit line for later use, if needed.
- Preserving other assets to use later or to leave to heirs.
- Delaying Social Security benefits.
- Lowering income earned from other sources to avoid paying income tax on Social Security benefits.
Maggie O'Connell, reverse mortgage loan specialist at The Federal Savings Bank in Reno, Nevada, explains, "If your income's over a certain amount, part of your Social Security gets taxed. If instead you're drawing from your HECM, which isn't taxable, you can keep (your income) under that threshold."
Gifting money to children
Gifting money to younger generations to help them pay off student loans, make a down payment to buy a house or for other reasons can be another use of a reverse mortgage loan.
"If their intent is to leave the property, what they actually leave is the equity, so why not gift it?" Cook says.
O'Connell says using a reverse mortgage loan as gift money can be smart if it doesn't put the borrower at risk of running out of money during his or her own lifetime.
If the equity in your home is "pretty much all you have on a low income," you should be cautious "not to give it away too readily," she says.
By the way, many seniors get a reverse mortgage loan and don't tell their adult children about it.
Paying to downsize or upsize
A reverse mortgage loan also can be used to sell a home and purchase another. That can be helpful for seniors who want to downsize or relocate closer to their family or friends. The new home can be larger or smaller and more expensive than the sold home.
Couples who divorce can use his and hers reverse mortgage loans to help them sell their current home and purchase individual homes that fit their separate needs, Cook says.
"Say they have to sell the house and they're each going to net $300,000. They can each buy a $600,000 house because they only need to put 50 percent down and they can have a reverse mortgage loan for the other 50 percent," he says.
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Buy an annuity?
One use of a reverse mortgage loan that's generally frowned upon is to purchase an annuity, a form of insurance that provides a monthly payment for the rest of a person's lifetime in exchange for a substantial upfront premium.
Paterson says that there are some "pretty strict restrictions" on this strategy and that seniors "need to really go in with their eyes open in making sure" it benefits them before they do it.
"You should not borrow money to invest in financial products," he says. "Taking it and going to Las Vegas might not be such a good idea, either."