The Home Equity Conversion Mortgage (HECM), aka reverse mortgage, is an extraordinary tool when utilized in the proper manner at the proper time for the proper individual. Similar to any other financial instrument, there are variations on how this is implemented. There are best practices that will ensure its use for the highest good. It is advisable that an interested party take the time to be fully educated and understand the implications of the loan. This will ensure a well-informed decision and a successful outcome in their overall financial plan. One of the eligibility requirements is that the potential borrowers obtain counseling by a Housing and Urban Development (HUD) Certified Counselor.
An individual cannot obtain the loan without completing this counseling session. It is advisable for an older adult that is competent but not savvy in financial matters to have a family member or someone they trust participate in that counseling session. Also recommended for the potential borrowers is to include trusted loved ones in the consultation session with the lender. The more education and clarity provided, the better the results. Sometimes family members can provide insight into details that might otherwise be overlooked.
Furthermore, education is paramount for the financial advisor. The fully-educated advisor is in the best position to decipher which of her/his client cases are the best fit. One can never make a blanket statement that a financial tool should always be utilized. There are factors beyond the financial scope to be considered, such as psychological and social ones that weigh into a decision.
A collaborative fact-finding mission is paramount for the homeowner and lender. Some of the things to uncover outside of a strictly fiscal position are the following:
- What are the plans to remain in the home?
- Does the homeowner want to move within the next twoyears or stay in the home as long as possible?
- What is the plan if the homeowner is unable to care for themselves physically? Consider asking the lender to calculate the funds available on a monthly basis to determine how long the money will last especially if they have increased home care service costs.
- Does the homeowner want to stay in the home at all costs or relocate to another type of living situation? Discuss the future implications and how it will affect the homeowner.
- Is there a shortfall in the income/cost analysis each month? If so, ask the lender to do a calculation so you have an idea of what is needed to fill that gap and how long it will last.
- What is the homeowner’s personality with regard to money? Will the availability to a line of credit entice the homeowner to overspend or are they more discerning in their elections? Is the homeowner easily manipulated by extended family? Do they need protection from themselves? If a homeowner believes having unlimited access to a line of credit might prove detrimental to his financial health, consider setting up disbursements into an automatic direct deposit of a predetermined amount. This will provide boundaries that will serve as fiscal and emotional protection.
It is important to keep in mind that this is no longer simply a need-based program. There have been many homeowners utilizing the reverse mortgage as a creative tool for managing their money and reducing their taxable event. One idea: instead of taking more than the minimum distribution out of their IRA and absorbing the tax implication, some homeowners have reduced their draw from the IRA to the minimum distribution and supplemented it with a monthly tenure payment from the reverse mortgage. This sustains the desired lifestyle while reducing the taxable event.
There is flexibility with the reverse mortgage to finance projects and prepay the loan with no prepayment penalty. Please note, there is no requirement to make any payment on a reverse mortgage loan until the home is no longer the primary residence. However, depending on the loan selection, if an individual pays the loan back after the mortgage insurance premium and interest due is paid, the funds simultaneously lower the loan balance and increase the line of credit. The line of credit may be drawn down and repaid during the life of the loan — a very nice feature.