Tapping Home for Cash
By Saghir A. Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities.)
A couple short on money wonders whether a reverse mortgage will help or hurt.
The Problem
Paula and Dennis Arntz were struggling. To supplement their Social Security, the couple, both 67 and retired, were pulling at least $500 a month from their small bank account. Maybe, thought Paula, they could lose their $1,200 monthly mortgage bill and fix their cash flow by taking out a reverse mortgage on their South Florida home. But she’d heard reverse mortgage horror stories - a wife forced to move after her husband died, heirs losing the family home.
The Advice
First, the basics: The most common reverse mortgage is known as a home equity conversation mortgage (HECM). It enables Americans 62 and older to borrow money against the equity in their home with no obligation to repay as long as they live there. Loans come in the form of a lump sum, lifetime monthly payments or a line of credit.
Reverse mortgages, increasingly popular in recent months, have a reputation sullied by reports of borrowers misled about their risks and consequences, among other problems. Here are questions that potential borrowers need to consider.
1. Is this your forever home?
HECMs are costly. If you or your spouse might want to relocate someday, or if your house isn’t suitable for aging in place, you’re better off selling and downsizing. The Arntzes, who live footsteps from the Intracoastal waterway, can’t imagine moving.
2. How much can you borrow?
Your loan limit is based on your home equity, your age and interest rates. The Arntzes, who owe $88,000 on a home that’s appraised at $340,000, would be able to borrow $189,000.
3. Do you know what it will cost?
Mortgage insurance is 2 percent of the home’s appraised value in most cases. Closing costs are similar to those of a traditional mortgage.
The lender’s origination fee varies and is negotiable. (Paula, who shopped around, was quoted figures ranging from $2,000 to $6,000.) The Arntzes’ upfront fees would total $16,000.
4. Where will the money go?
You’re courting disaster by getting the cash without a plan. If you blow through the money, there’s no do over. But Paula had it all mapped out. After paying upfront costs and their old mortgage, she and Dennis would have an $85,000 line of credit available. They planned to put $18,500 into savings and to leave the rest for emergencies.
5. Can you afford other costs?
Though you won’t have to make monthly mortgage payments, you’ll risk foreclosure if you don’t stay current on your taxes, insurance, homeowner fees and upkeep. For the Arntzes, these expenses total about $500 a month - a figure they can handle.
6. Who is borrowing?
If you’re married but only one of you borrows, things can get dicey. For example, if the borrower lives elsewhere for 12 months or more - say, in assisted living - the loan will come due and the other spouse will probably have to move. The Arntzes, both borrowers, don’t have this concern.
7. What happens after you’re gone?
Your lender gets back its money-mare than what you borrowed, since interest (that you didn’t have to repay at the time) was accumulating on your HECM over the years. Your heirs will have to pay off the mortgage if they want to keep the house, or they’ll have to sell the home, receiving any proceeds left over after the lender has been paid. Dennis’ two adult daughters are aware of the couple’s plan and are on board with it.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
