Reverse Mortgage: Seniors’ Alternative Fix to Social Security Snag

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A dose of reality: Twenty-one years from now, the Social Security trust fund, all seniors are banking on for their retirements, will be exhausted [read: drained; empty].

In the 2012 Old-Age, Survivors, and Disability Insurance (OASDI) Trustees Report released this month, the Office of the Chief Actuary revealed that OASDI trust fund assets will start to diminish in 2021, and ultimately become used up in 2033. As an effect, the Social Security Administration may not be able to live up to its promised benefits for retirees. For more detailed information, visit Social Security Administration's website.

This article is not intended to cause panic or fear among our seniors or those who will be seniors by 2033 (40+ as of this writing), but to encourage them to play smart and consider some adjustments in their retirement plans.

As the Center for Retirement Research at Boston College put it, there is no 'silver bullet' to addressing the Social Security's pending deficit.

For the government's side, the solution can either be putting more money into the program or cutting seniors' benefits.

For the retirees, they may choose to increase savings for retirement and invest, delay their retirement, work part-time in retirement, and/or turn available assets into income.

For those seniors keen on turning available assets into income, home equity release or reverse mortgage is the typical choice. In the last 22 years, around 600 thousand seniors in the country have opted for reverse mortgage. 

What Is A Reverse Mortgage?

Home Equity Conversion Mortgage (HECM), popularly known as reverse mortgage, is a program backed by the Federal Housing Administration (FHA) that enables seniors 62 years and older to withdraw a portion of their property's equity.

Qualified properties include single-family home and two and four-unit home. For seniors with single-family home, their primary residence should be the same property being applied for HECM. For seniors with a multiple-unit home, they should be the occupants of one of the units being subjected to HECM.

Reverse Mortgage: Advantages and Disadvantages

Like any other initiatives, HECM has its advantages and disadvantages. Seniors should weigh the benefits and costs of the program before jumping on the reverse mortgage wagon.

Advantages include but not limited to:

1.) Reverse mortgage is considered a loan advance. A loan advance under the Internal Revenue Service is not regarded as income, thus, is tax-free.

2.) Technically, the property is still owned by the HECM participant, not the bank. However, like any typical property owner, an HECM participant has an obligation to pay for the property's maintenance, insurance, and tax.

3.) FHA-insured HECM has no monthly payments and any debt incurred by the senior cannot be passed on to heirs. As a counterbalancing measure, a senior cannot borrow more than the property's value.

Disadvantages include but not limited to:

1.) An HECM participant is financially liable for initial and annual mortgage insurance premiums, servicing and origination fees, third party charges (surveys, inspection etc.), and interest.

2.) Possible negative impact on Medicaid (not Medicare or Social Security) benefits. While Medicaid treats reverse mortgage as loan and not an income, money from a reverse mortgage should be spent in the month the HECM participant receives it. Any amount a senior keeps for the following month will be counted as a valid resource. For an individual who is in Medicaid, allowable resource should not exceed $2,000 while the limit for a married couple is at $3,000.

3.) Diminished home equity value passed on to heirs.

Make an Informed Decision 

Whether a senior's interest on reverse mortgage is driven by financial trouble or not, it is always wise to get the necessary information first before talking to a lender. The Department of Housing and Urban Development provides valuable resources. There are also some web-based free services on reverse mortgage comparison and other valuable tools for better and comprehensive reverse mortgage options.

 

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