Estate and Financial Planning with Reverse Mortgages

Most FHA HECM reverse mortgages today are used by homeowners as a means to stay in their home or to improve their lifestyle, but as planners become more aware of the true cost of a reverse mortgage and as planning uses of  reverse mortgages are developed (to a large extent by major insurance companies) , we believe the future of reverse mortgages is in the area of estate and financial planning. New techniques are being developed and all planners should be familiar with this new tool.

For example, a Philadelphia area couple in their mid 70’s could no longer afford paying the $895 mortgage payment on their second home. At the suggestion of their financial planner, they used part of the proceeds of a reverse mortgage on their primary residence to pay off the mortgage on their second home, thus eliminating their mortgage payment. They continue to own both homes, can benefit from the appreciation on both homes, and can make voluntary payments on their reverse mortgage if they so choose. Because of the reverse mortgage they should be able fulfill their retirement dream which is to eventually sell the primary residence and move to the second home.

Ms Colleeen Moore, President of Golden Equity Mortgage of San Diego provided the following examples at the October 2008 annual meeting of the National Reverse Mortgage Lenders Association.

1. An elderly woman owned a 1.2 million dollar home but was running short of cash. To sell the home would have meant a $250,000 capital gain tax and finding a new place to live, but if she kept the home the heirs would likely inherit the home at a stepped up basis and thus avoid the $250,000 tax. The reverse mortgage suggested by the planner would be far less costly than paying the tax and wouls provide the cash for the elderly woman to remain in her home, a solution that pleased the entire family.

2. A woman with a large estate used a reverse mortgage lump sum to purchase a single premium life insurance policy that was placed in an irrevocable life insurance trust. Estate taxes saved were expected to far exceed the cost of the reverse mortgage.


Another planning possibility involves a couple in their 60's drawing down on their 401K to pay $2000 per month on a $180,000 mortgage. A reverse mortgage would eliminate the mortgage payment and the drain on their 401K.  After 10 years they would avoid having to draw $2000 x 12 x 10 = $240,000 in monthly payments from their 401K and the future balance in their 401K could potentially offset some or even all of the cost of the reverse mortgage. Should they get a reverse mortgage? That is something they should only decide with the advice of their financial advisors, but this example points out something about reverse mortgages that is sometimes overlooked -  there is a substantial offsetting financial benefit to the homeowner in the future value of the payments not made (the cash retained) over the life of a reverse mortgage.

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