Have you seen the sign, “Too much month at the end of the money?” That applied to Pat and Mary’s situation. In their mid 70’s, Pat and Mary planned for their retirement and have a good plan in place. But as their life changed they found there wasn’t enough money to last through the end of the month. Creating the needed additional funds for each month from their retirement plan would impact their resources for their future. Therefore their financial planner suggested they look into using their home equity and explore a reverse mortgage.
A mortgage just like any other mortgage, the reverse mortgage offers special terms for senior home owners 62 and older. With the FHA insured reverse mortgage, Home Equity Conversion Mortgage (HECM), the most popular and only one available in Minnesota, there are no income or credit score requirements to impact the interest rate and no monthly mortgage payment requirements. *(See note below about Financial Assessment.)
The funds available can be received in a lump sum, monthly payments, a line of credit, or a combination of these. The monthly payments can be structured as tenure payments (as long as you occupy home as primary residence) or as one needs as long as the home is the primary residence of at least one of the borrowers. Funds in the line of credit grow so more funds can be available in the future.
The loan is due and payable when the home is no longer the primary residence of the borrower(s) such as they move, sell or die, or on their 150th birthday. As a non-recourse loan, if the loan balance is higher than what the home can be sold for, the borrower(s) or their estate don’t have to pay with the difference, the FHA Mortgage Insurance Premium (MIP) covers the difference. And if the home is sold for more than the loan balance, the borrower(s) or their estate receive the difference.
After being educated about the reverse mortgage including the positives and negatives, rather than using their retirement funds so they could be protected for their future needs, Pat and Mary decided to do a reverse mortgage.
Doing the Standard Adjustable Rate HECM, they set up the proceeds available to receive a portion in monthly payments, with the balance in a line of credit that they can use if and when they need it.
Receiving the monthly payments allows them to live comfortably, meeting their living expenses without running out of funds before the end of each month.
The line of credit grows at the rate on the reverse mortgage plus 1.25, i.e. if the rate is 2.5% the growth rate will be 3.75%. If the interest rate goes up, the growth rate does also. This means that more funds will be available in their unused portion of their line of credit. They can use these funds for an emergency such as car repairs, a new furnace, medical expenses or for other needs and desires such as making a trip for a family reunion or out of town wedding.
With the reverse mortgage in place providing monthly cash flow and a line of credit for other needs, Pat and Mary’s retirement funds can be protected for their future. They are living their retirement years with a good plan along with funds for their current needs. Now they have more money at the end of the month – what a way to live in retirement!
*As of April 27, 2015 income and credit are used for the Financial Assessment to determine borrower’s ability and willingness to pay property taxes and insurance into the future
©2013-2015 Beth Paterson, Beth’s Reverse Mortgage Blog, 651-762-9648
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