Retired Military Finances 301: Should Mom (and/or Dad) Get a Reverse Mortgage?

The reality is that many senior citizens have a lot of their money tied up in their house. Or put another way, they are house rich but cash poor. If Mom is in that situation, a reverse mortgage may help out. Reverse mortgages have a less than stellar reputation. Some of that may be deserved. Relying on a reverse mortgage as a lifeline may not be the best option. It also might be the only option. So, if Mom (and/or Dad) is considering one, here are some things you should know.

How Does Mom Qualify for a Reverse Mortgage?

There are a few basic requirements to qualify to get and keep a reverse mortgage

The youngest borrower must be 62 or older
All borrowers must be owners of the property
Mom needs to live in the house (keep this one in mind…it’s important)
The reverse mortgage must be the only loan on the property
HUD approved counseling on reverse mortgages is required
Need to keep taxes and insurance up to date
Mom does not need to qualify for the loan (no income or credit score requirements)

While there isn’t income or credit score requirements, low income or credit scores may result in a requirement that projected taxes and insurance are paid in advance (as a part of the loan)

How Does a Reverse Mortgage Work?

Money received by Mom does not have to be repaid until a triggering event occurs. There are 3 triggering events

Death of last owner
Ceasing to use the home as a primary residence
Failure to provide basic maintenance or pay taxes and insurance

When the triggering event occurs, you have up to 12 months, generally, to sell the house and pay off the loan. If the loan value exceeds the value of the house, the lender eats the difference.

How Much Money Can Mom Get?

As my favorite Weapons Officers used to say, “It Depends.” The amount Mom can get depends on several things and there is some math involved.

Start with the appraised value of the house to a maximum of $1,089,300 (2023, adjusts with inflation)
Determine the Initial Principal Limit (IPL) which is normally between 60% to 80% of the appraised value and will vary based on age of borrower and interest rates
Multiply appraised value by IPL. This is the maximum loan amount…but you’re not done
Subtract 0.5% of appraised value from maximum loan amount for mortgage insurance. Amount increases to 2.5% of appraised value of the home if more than 60% of max taken out in the initial disbursement. You’re still not done
Subtract closing costs which include 2% of first $200,000 of appraised value and 1% on remainder (there are minimum amounts and maximum amounts) plus other typical closing costs like title insurance and settlement fees
If Mom needs to pay taxes and insurance in advance, subtract that amount too.

If you don’t want to go through all this math, there are calculators on-line (google max HECM loan amount)

How can Mom Get Money from a Reverse Mortgage?

There are basically three ways to get money.

A lump sum
Monthly payments (will pay for life…as long as Mom stays in the house)
A guaranteed line of credit, which means it can’t be cancelled or called

Or Mom can combine the above

What are the Expenses Associated with a Reverse Mortgage?

Beyond the costs of getting the loan, Mom will pay interest on the loan and an annual mortgage insurance premium of 1.25% of the loan balance. The interest in most cases will be a variable rate. Some but not all lenders will charge a service fee of around $30/month. It is important to remember that these expenses become a part of the loan and are not paid until a triggering event occurs.

How Can Mom Use the Reverse Mortgage?

As mentioned above, many times reverse mortgages are used to help with cash flow. Perhaps she can use the monthly cash payments to help pay for living expenses or care. Or perhaps she can pay off an existing mortgage with a reverse mortgage and stop making a mortgage payment, which will help her cash flow. Or maybe a lump sum is needed for a one-time expense.

Other Ways to Use a Reverse Mortgage.

Since I’m a planner, I like to talk about ways to plan to use a reverse mortgage. There two ways I like.

Upon retirement set up a reverse mortgage with a line of credit. In years where the market tanks, use the reverse mortgage to pay living expenses rather than selling investments at a loss. This can be a replacement for a cash bucket and reduce cash drag on the portfolio.

When you downsize and move into your forever home. Reverse mortgages can be used to buy houses too, but due to the way the maximum loan amount is calculated you’ll need to bring a lot of cash to the table. Let’s say your plan has been to sell your expensive Northern Virginia house, move to North Carolina and use the proceeds to pay for the house. Let’s say you net $800,000 on the NOVA house and find a house in NC you really like but it costs $1,000,000 (it’s smaller but on the beach). You really don’t want to add a house payment to your planned cash flow. You don’t have to. You could get a $200,000 reverse mortgage (assuming the numbers work out), get the house and never make a mortgage payment. Pretty cool, huh?

Military Finances are Different

While everyone is treated the same when it comes to reverse mortgages, that isn't always the case. The tax code has special carve outs for active and retired Senior Military Officers and NCOs. You also have unique financial benefits not available to civilians. That's why we think you should work with a Financial Planner/Advisor that deals with your issues every day. If you'd like to learn how we do things, use the button below to schedule a free initial consultation.

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