What Reverse Mortgage TV Commercials Don’t Tell You
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Tom Selleck and other charming celebrities have pitched reverse mortgage plans to senior citizens for years in television ads like Selleck’s ad posted on YouTube. Mr. Selleck says reverse mortgages are not “too good to be true,” but should people believe him? Well, it depends… on age, homeownership, home equity, intended use of loan proceeds, physical health stability, priorities to leave inheritance for family, and other considerations.
HECM DESCRIPTION: A reverse mortgage is a mortgage-based financial planning strategy insured by the US Department of Housing and Urban Development (HUD). A reverse mortgage (officially, a “Home Equity Conversion Mortgage,” or “HECM”) allows a homeowner aged 62 years or older to mortgage the home and borrow money without having to make loan payments, including interest and principal, for as long as the person lives in the home. The HUD website says about a HECM, “Many seniors use it to supplement Social Security, meet unexpected medical expenses, make home improvements and more.”
AGE: Age matters because a qualified HECM borrower must be at least 62 years old.
RESIDENCE: A qualified HECM borrower must occupy the real estate as the borrower’s residence, so farm, business, or investment property does not qualify for the program.
OWNERSHIP: A qualified HECM borrower must own the residence alone or with a spouse, so if the homeowner shares the home ownership with nonqualified people, such as the borrower’s children, the real estate will not qualify for the program.
HOME EQUITY: A HECM plan can refinance an existing mortgage, but low equity will reduce HECM funds availability for other costs that reverse mortgage advertisements promote.
USE OF FUNDS: A HECM plan to withdraw or spend a large amount of money at the beginning of the loan costs more than if the borrower withdraws money from the loan account gradually over a long period of time. The basic HECM costs are the Mortgage Insurance Premium (MIP), third-party charges, and origination fee, a servicing fee, and interest on the outstanding mortgage loan balance. A big lump sum HECM distribution triggers an initial MIP cost that is 2.5% of the amount of the initial loan distribution for something like refinancing an existing mortgage, but a small distribution to help supplement monthly Social Security income may only trigger a 0.5% MIP. Also, there is an annual MIP hat equals 1.25% of the outstanding mortgage balance. Additionally, although a HECM require loan payments, unpaid interest grows the unpaid loan balance, which becomes due and payable when the borrower dies or moves out of the home permanently.
REASONABLE HECM USES:
- paying off a high interest rate loan
- remodeling a home for safety or energy efficiency
- supplementing income to pay people to cook, clean, or perform other tasks for a disabled homeowner
- paying monthly expenses that would otherwise consume other assets
- selling a paid off house and purchasing a disability-friendly house
- cash to help replace aging vehicles or other worn out assets
POOR HECM USES:
- paying medical bills that could be paid or simply with proper financial planning
- making gifts to family members
- financing vacations or other luxuries
- generating cash for money-making investments
- supporting home health care for a homeowner who whose declining health requires full-time nursing home care
HECM/ESTATE PLANNING CONFLICT: HECM strategies often conflict with asset protection and family inheritance estate planning strategies. Any transfer of residential ownership or change of residential occupancy can trigger the requirement to pay off a HECM loan. A homeowner who lacks enough money to pay off a HECM loan may have to sell the home or other assets that would otherwise pass through an estate plan.
HUD’S HECM PROMOTION: HUD promotes the HECM program and outlines basic HECM requirements on its website. HUD’s presentation of the information seems more like a product promotion than balanced guidance about HECM benefits and problems.
A GRAIN OF SALT: People should take the information on both HUD webpages with a grain of salt. A wise person will examine the government website with the same caution and healthy skepticism that everyone should use about legal and financial service advertisements. There is no substitute for consulting with an experienced elder law attorney about HECMs along with the full range of other estate planning alternatives because, ultimately, almost every promise is too good to be true for some people.
Jeff R. Hawkins and Jennifer J. Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers and active members of the Indiana State Bar Association and National Academy of Elder Law Attorneys. Both lawyers are admitted to practice law in Indiana, and Jeff Hawkins is admitted to practice law in Illinois. Jeff is also a registered civil mediator, a Fellow of the American College of Trust and Estate Counsel and the Indiana Bar Foundation; a member of the Illinois State Bar Association and the Indiana Association of Mediators; and he was the 2014-15 President of the Indiana State Bar Association.
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