The “Sandwich Generation” and How a HECM Can Be a Valuable Financial Tool
You may be asking yourself, “What is the Sandwich Generation”? With your kids in (or heading for) college, and aging parents also now (or soon to be) in your care, you see additional expenses and feel sandwiched in the middle. Most established Americans have up to two thirds of their wealth tied up in equity in their home. The Home Equity Conversion Mortgage (HECM), or reverse mortgage, is a financial tool that is being more commonly identified by financial advisors and consumers as a valuable tool to be employed in the financial planning process.
The HECM is one of the most misunderstood financial products available. A reverse mortgage in general is a home loan that allows persons 62 and older to access equity in their home with a product that has much greater flexibility than a traditional “forward” mortgage. The home owner can choose not to make any mortgage payments on the home as long as they live in the home.1
A borrower can choose to purchase a new home with a HECM by downsizing or upsizing to a nicer or larger home. Or one can refinance with many flexible options. A lump sum of cash can be received, a lifetime monthly income stream can be elected, or a secure and guaranteed growing line-of-credit (LOC) can be established as an alternative for a source of cash flow or emergency fund. It is the flexibility of the reverse mortgage that makes it such an important financial tool to consider.
Future articles will dive deeper into the many facets of this product that financial advisors are increasingly including in designing long-term financial plans. Even though the governmental regulatory protections for the consumer are high, there are still hesitations that arise from misconceptions of a reverse mortgage. I have addressed the most common ones below.
1. The bank will own my home
This is the most common misconception. Think of this as any other mortgage but with added features, benefits, and flexibility that other mortgages do not have. Homeowners retain title and ownership of their home and can choose to sell it at any time. You must simply continue to pay the property charges and maintain the home as your principal residence. When the last borrower leaves the property, your heirs will still have the opportunity to refinance or sell the home.
2. Only desperate people get reverse mortgages
While this product may allow some with low income to qualify for a home that would not otherwise qualify, many borrowers choose this product to eliminate monthly payments. Many people use the reverse mortgage for a financial strategy by delaying taking Social Security so they can get the maximum payout later. Or use as a financial strategy to keep funds in their retirement portfolio to maximize returns, or as a tax savings strategy, since loan proceeds are tax free.
3. I will owe more than the value of the home
Under the current guidelines, it is unlikely one would not have equity when selling their home. The non-recourse feature however prevents this from happening. FHA ensures that you or your heirs would never owe more than the value of the home at the time it is sold. In fact, when the last borrower leaves the home, your heirs may qualify for a reduced payoff (95% of value) for homes with no equity.
4. I do not want to lose my Medicare or Social Security benefits
The money that you receive from a reverse mortgage is equity from your home. It is not income and the money is tax free.2 Since the money is from the loan on your home it will not affect what you pay for Medicare, how your Social Security benefits are taxed, or your eligibility for Medicaid. You or your heirs can also deduct interest on a limited amount of debt when the loan is repaid.
5. You must own your home free and clear to qualify
One must have equity based on their age and the value of the home. Most will use some of the loan proceeds to pay off the existing loan.
6. I won’t qualify with low credit scores
HECMs have no credit score requirements. Instead, the lender uses “financial assessment” to determine if the loan is a sustainable solution for the borrower. This includes examining credit history, property charge history, and residual income. Consequently, many homeowners who do not qualify for traditional financing are good candidates for a reverse mortgage.
Not for every situation
“Is as reverse mortgage right for my parents, me, or the overall financial strategy for my family?” Without knowing all the details, this would be difficult to determine. Despite the fact that a reverse mortgage is a secured loan against your property, there are situations where a reverse mortgage may not be right for you. Here are some examples of when a reverse mortgage product doesn’t make sense for your retirement plan:
If the home is not a good fit for you. If you have the intention of selling the home in the short-run, or if the home does not meet your long-term physical needs, this may not be a good financial tool for you.
If the Reverse Mortgage doesn’t tangibly improve your financial situation. It has to make sense. For some people, paying off an existing forward mortgage still leaves them with a monthly budget short fall. If it doesn’t solve the financial crisis you are in, then it isn’t a good option for you.
If it puts a family member’s housing at risk. The loan generally becomes due within a year when you no longer occupy the home. If plans are not made for someone else to pay off or refinance the loan that is relying on staying in the home when you leave, other options should be explored.
If you don’t have a plan for how to manage the proceeds. You must continue to pay property charges and living expenses for the HECM to continue. If there is reasonable doubt that this will happen, there may be other options.
Consult a professional
As with all major financial decisions, a reverse mortgage should be part of your overall strategic plan. Accessing your home equity can be a great way to add freedom and flexibility to you or your parent’s retirement financing, but there are factors that need to be considered. Consult an experienced and qualified financial advisor and HECM mortgage advisor if you have any questions about how to use a reverse mortgage to enhance your retirement plan3
1“The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loan obligations, then the loan will need to be repaid.”
2“Not tax advice. Consult a tax professional.”
3These materials are not from HUD or FHA and were not approved by HUD or a government agency.
2020 Vintage Mortgage Professionals is a division of Finance of America Mortgage LLC | Equal Housing Opportunity | NMLS ID #1071 (www.nmlsconsumeraccess.org)| 300 Welsh Road, building 5, Horsham, PA 19044 | (800) 355-5626 | Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act| Vintage Mortgage Professionals is not a tax consultation firm. Please seek advice from a tax professional. This document is provided by Vintage Mortgage Professionals. Any materials were not provided by HUD or FHA. It has not been approved by FHA or any Government Agency. |The reverse mortgage borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, hazard insurance. The borrower must maintain the home. If the borrower does not meet these loan obligations, then the loan will need to be repaid |This is not a commitment to lend. Prices, guidelines and minimum requirements are subject to change without notice. Some products may not be available in all states. Subject to review of credit and/or collateral; not all applicants will qualify for financing. It is important to make an informed decision when selecting and using a loan product; make sure to compare loan types when making a financing decision.
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