How to Avoid Being A Burden to the State and Your Family

I’d like to share a real-life scenario that illustrates how a reverse mortgage can provide improved cash flow for years to come.

Brenda, 67, was in a financial bind. Over 56% of her income was going out to service her monthly mortgage payment. Not a good place to be in.

Along with a reverse mortgage we looked at several other options.

The first was potentially downsizing. This was not really an option as she already lived in a smaller, lower value home.

The second was selling her home and buying a property with a mother-in-law unit with her daughter’s family. She would provide the down payment from the sale of her home and her daughter would get the loan. Her daughter’s family would live in the home and she would live in the mother-in-law unit. Unfortunately, her daughter’s family were not interested in that option.

The third was refinancing into a conventional forward mortgage. The savings would have been negligible because the loan balance was so small. She would have only saved about $100 a month.

After those options were explored and found not to work for her, we were back at the reverse mortgage and figuring out how to structure it so that it would have the most financial impact.

We reworked the numbers in many ways, and we eventually found the answer to her problem: I was able to determine that if she paid off the balance of her existing mortgage with her retirement accounts, it accomplished several things and added significantly to her cash flow.

First, she would have no monthly mortgage payment saving her $300 a month. 

Second, we would have enough equity at that point to set up a LESA, Life Expectancy Set Aside, which is where a portion of the equity she could have borrowed with a reverse mortgage is set aside to pay her taxes and insurance for her. This would save her $169 a month in out-of-pocket costs. (It is estimated that this set aside will pay her taxes and insurance for her for 18 to 25 years)

Third, we were able to set her up with a Home Equity Conversion Mortgage (HECM) — which is an FHA-insured reverse mortgage? — line of credit from which she can draw as needed. She will be able to draw $380 monthly for an estimated 18 years, if she chooses to take her funds that way. With a HECM reverse mortgage, she also has the flexibility to change how she receives her funds in the future, if she wants or needs to.

Fourth, given her current draw schedule from her retirement accounts, those funds were estimated to last less than 5 years. Waiting until those funds were exhausted to get a HECM would have more than likely resulted in an outcome that would be significantly less beneficial to her monthly cash flow. So much so, that there would have been a very high chance of her being a burden to the state or her family.

Overall, the way this is structured is adding $849 a month to her cash flow, now and for the next 18 years. 

Matt Allen NMLS 254296 specializes in reverse mortgages throughout the state of Oregon. He is the author of "The Ultimate Guide to Reverse Mortgages and 16 Excellent Reasons to Get One". He has been featured in both local and national print as well as featured on radio and TV.

?This material has not been reviewed, approved or issued by HUD, FHA or any government agency. The company is not affiliated with or acting on behalf of or at the direction of HUD/FHA or any other government agency. 

Charges such as an origination fee, mortgage insurance premiums, closing costs and/or servicing fees, if applicable, may be assessed and will be added to the loan balance. As long as you comply with the terms of the loan, you retain title until you sell or transfer the property, and, therefore, you are responsible for paying property taxes, insurance and maintenance. Failing to pay these amounts may cause the loan to become immediately due and/or subject the property to a tax lien, other encumbrance or foreclosure. The loan balance grows over time, and interest is added to that balance. Interest on a reverse mortgage is not deductible from your income tax until you repay all or part of the interest on the loan. Although the loan is non-recourse, at the maturity of the loan, the lender will have a claim against your property and you or your heirs may need to sell the property in order to repay the loan, or use other assets to repay the loan in order to retain the property.

The estimates shown are based on a Oregon property and the HECM Annual ARM as of 10/23/2018. Assumptions include a home value of $207,000 and a 67 year old borrower with a $0 lien. The initial interest rate of 4.996% tied to 1 year LIBOR with a margin of 1.875%. In this example, closing cost include an origination fee of $4,070, third-party closing costs of $3,329.45 depending on purchase price or appraised value, and an up-front FHA Mortgage Insurance Premium of $4,140 depending on purchase price or appraised value. The initial Annual Percentage Rate (APR) is 5.496%. The information being displayed is for illustrative purposes only. Interest rates and funds available may change daily without notice. Please call 1-800-214-1265 or visit reversefunding.com for details about credit costs and terms.

? 2019 Reverse Mortgage Funding LLC, 1455 Broad St., 2nd Floor, Bloomfield, NJ 07003, 1-888-494-0882. Company NMLS ID # 1019941. www.nmlsconsumeraccess.org. Not all products and options are available in all states. Terms subject to change without notice. Certain conditions and fees apply. This is not a loan commitment. All loans subject to approval. L2479-Exp022020