The Top 6 Objections to Reverse Mortgages

At NewRetirement we understand how hard it is to save enough cash for retirement. We hear awful stories of seniors suffering financially.

However, many of you have paid off or paid down your mortgages and actually have substantial savings in your home equity. If you are rich in home equity but cash poor, a reverse mortgage might give you the financial breathing room you need.
how reverse mortgages work
While a reverse mortgage is not right for everyone, sometimes the only thing holding us back from really looking at the product is a stronger understanding of how reverse mortgages work.

By addressing some of the top objections that we hear about Home Equity Conversion Mortgages (HECM) (also known as reverse mortgages), we hope to help our readers understand just how useful these loans can be. We invite you to do yourself a favor and approach this with an open mind, as some of these answers may surprise you! Here are the biggest reverse mortgage objections.

This is the most repeated objection we hear from retirees, most often from those who are closer to age 62.

A reverse mortgage does not cause you to sell your home. You are the only person on the title and you retain all ownership. A reverse mortgage is just a loan that allows you to access an advance on a portion of your home equity. This is the reason you and your spouse (if applicable) are able to continue living in the home indefinitely. You still “own” your home the same way you would with a traditional mortgage.

The amount of home equity you can access through a HECM generally starts at about 50% of your home’s value at the earliest age you are eligible for this type of product, which is age 62. As you get older, the percentage of the home’s value you qualify for increases.

In fact, the limited loan amount is actually good news for two reasons:

Although a reverse mortgage is designed to help retirees age in place, having a smaller balance allows you to exit the home earlier if that is what you need.

If you find that your life plan has suddenly changed, and you want to downsize or relocate, you can pay off your reverse mortgage and use the remaining proceeds from the sale of your home to accommodate that change in location.

Establishing a HECM line of credit earlier rather than later allows you to grow your line of credit over time. It also allows you to lock in your home’s current value since the HECM benefit doesn’t drop if home prices go down. It’s a little known fact that a reverse mortgage line of credit grows year after year. Some think of it as a guaranteed annual limit raise on your credit card.

This line of credit is similar to a traditional Home Equity Line of Credit (HELOC) but there are some interesting differences. Once your reverse mortgage line of credit is established it cannot be revoked unless you default on the terms of your loan. What’s more, a reverse mortgage line of credit does not have income requirements as long as you can prove your creditworthiness by submitting to a lender’s financial assessment.

The line of credit grows every year because the unused portion of the credit line grows with your loan interest plus the mortgage insurance premium renewal. That means the longer you wait to tap your line of credit, the more credit you have to borrow against.

Once you lock in your appraised value for the purpose of a reverse mortgage, market value decreases do not affect what is available to you on your monthly payments or reverse mortgage line of credit going forward.

Many consumers understand that borrowing from your own equity is not the same as selling your home, but they still may think the amount they qualify for is too little.

Keep in mind, when you convert your home equity to available cash, it is important for that money to last in retirement. You also want to continue to have a stake in your home value, which is represented by the equity reserves remaining in your home. As those equity reserves become depleted, the true ownership percentage in your home gets smaller over time.

The restrictions on HECMs were put in place by the government to nudge borrowers away from borrowing too much, too soon.

That said, if you establish a reverse mortgage line of credit now, it’s there as a security blanket, when you really need it. If you don’t need it for 10 years, your line of credit will grow substantially over that time, and could possibly be more than the market value of your home over time.

Many consumers argue that the fees involved with a reverse mortgage transaction are too high, while those of us who have taken advantage of lower interest rates to refinance our mortgage balances are less sensitive to the closing costs involved.

People who have looked at refinancing their home loans know that there are costs involved and they should consider the cost of refinancing versus the potential savings over time that a more favorable interest rate might bring.

Being that this loan is designed as a longer term way to access your home equity, you should realize that most of these closing fees are not “out of pocket” costs, but are deducted from the gross proceeds of your reverse mortgage loan.

Just like a traditional refinance, it’s also important to put reverse mortgage fees into perspective by amortizing them over the life of your loan. Most consumers who take out a reverse mortgage plan to stay in their home for at least 15 to 20 years.

When the closing costs are viewed long term, it should be considered a trade-off for not having to make a monthly mortgage payments going forward combined with the security and flexibility that come with having access to your home equity.

You may think you don’t need the extra money now, but when an unexpected financial crisis hits, accessing your home equity last minute with a reverse mortgage is not easily done. This type of loan can take upwards of 45-90 days to fund. Having a reverse mortgage line of credit available can be smart for several reasons:

  • It’s there if you need it, and the bank cannot pull the line of credit if your finances change.
  • It grows over time, so the amount of equity you can access becomes larger year over year.
  • When the market isn’t performing, you can draw from your equity instead of liquidating investments. When the market is doing well, pay your line of credit back if you want to keep the balance low.

A reverse mortgage line of credit is utilized by planners who like to have a backup strategy. It’s not a matter of needing the money now, but it can be used to avoid being up against a wall when the need arises.

Not all parents are generous enough to want to leave a financial legacy to their children. Unfortunately that financial legacy comes at the price of you passing away.

How nice would it be to help your children or grandchildren while you are still alive? If your children or grandchildren need financial assistance now, you can draw down a portion of your home equity to do that. And you get to see the benefit it provides them.

Finally, if you get a HECM and don’t use up your home equity, then any remaining equity is available for your heirs.

It is most often those who misunderstand the product or don’t know the facts about reverse mortgages, who say it’s a terrible idea. The fact of the matter is that reverse mortgages are not for everyone, but they help many seniors live better while remaining self-sufficient.

Reverse mortgages are not a good idea for someone who plans on relocating within a few years or needs to go into assisted living. It’s also probably a bad idea for a person who isn’t responsible with their savings.

Ask the person who was able to retire at 65 instead of 70 how much of a terrible idea it was! It’s time to really enjoy your golden years. According to scholars at the Ohio State University, “Reverse mortgage borrowers have significantly higher financial and housing satisfaction compared to nonborrowers.”

If finances are holding you back from truly loving retirement, and you have a nest egg in your equity, you deserve better. A better retirement is within reach!

The best way to keep your options open and truly evaluate this strategy is to start with one or several free written proposals from a credible lender. A written proposal will answer all your questions about interest rates, closing costs, monthly drawdown amounts, and even provide an amortization schedule so you can see how your line of credit and the accumulated balance grows over time.

Source: newretirement.com

An Overview of Filial Responsibility Laws

Father in a wheelchair and son outsideTaking care of aging parents is something you may need to plan for, especially if you think one or both of them might need long-term care. One thing you may not know is that some states have filial responsibility laws that require adult children to help financially with the cost of nursing home care. Whether these laws affect you or not depends largely on where you live and what financial resources your parents have to cover long-term care. But it’s important to understand how these laws work to avoid any financial surprises as your parents age.

Filial Responsibility Laws, Definition

Filial responsibility laws are legal rules that hold adult children financially responsible for their parents’ medical care when parents are unable to pay. More than half of U.S. states have some type of filial support or responsibility law, including:

  • Alaska
  • Arkansas
  • California
  • Connecticut
  • Delaware
  • Georgia
  • Indiana
  • Iowa
  • Kentucky
  • Louisiana
  • Massachusetts
  • Mississippi
  • Montana
  • Nevada
  • New Jersey
  • North Carolina
  • North Dakota
  • Ohio
  • Oregon
  • Pennsylvania
  • Rhode Island
  • South Dakota
  • Tennessee
  • Utah
  • Vermont
  • Virginia
  • West Virginia

Puerto Rico also has laws regarding filial responsibility. Broadly speaking, these laws require adult children to help pay for things like medical care and basic needs when a parent is impoverished. But the way the laws are applied can vary from state to state. For example, some states may include mental health treatment as a situation requiring children to pay while others don’t. States can also place time limitations on how long adult children are required to pay.

When Do Filial Responsibility Laws Apply?

If you live in a state that has filial responsibility guidelines on the books, it’s important to understand when those laws can be applied.

Generally, you may have an obligation to pay for your parents’ medical care if all of the following apply:

  • One or both parents are receiving some type of state government-sponsored financial support to help pay for food, housing, utilities or other expenses
  • One or both parents has nursing home bills they can’t pay
  • One or both parents qualifies for indigent status, which means their Social Security benefits don’t cover their expenses
  • One or both parents are ineligible for Medicaid help to pay for long-term care
  • It’s established that you have the ability to pay outstanding nursing home bills

If you live in a state with filial responsibility laws, it’s possible that the nursing home providing care to one or both of your parents could come after you personally to collect on any outstanding bills owed. This means the nursing home would have to sue you in small claims court.

If the lawsuit is successful, the nursing home would then be able to take additional collection actions against you. That might include garnishing your wages or levying your bank account, depending on what your state allows.

Whether you’re actually subject to any of those actions or a lawsuit depends on whether the nursing home or care provider believes that you have the ability to pay. If you’re sued by a nursing home, you may be able to avoid further collection actions if you can show that because of your income, liabilities or other circumstances, you’re not able to pay any medical bills owed by your parents.

Filial Responsibility Laws and Medicaid

Senior care living areaWhile Medicare does not pay for long-term care expenses, Medicaid can. Medicaid eligibility guidelines vary from state to state but generally, aging seniors need to be income- and asset-eligible to qualify. If your aging parents are able to get Medicaid to help pay for long-term care, then filial responsibility laws don’t apply. Instead, Medicaid can paid for long-term care costs.

There is, however, a potential wrinkle to be aware of. Medicaid estate recovery laws allow nursing homes and long-term care providers to seek reimbursement for long-term care costs from the deceased person’s estate. Specifically, if your parents transferred assets to a trust then your state’s Medicaid program may be able to recover funds from the trust.

You wouldn’t have to worry about being sued personally in that case. But if your parents used a trust as part of their estate plan, any Medicaid recovery efforts could shrink the pool of assets you stand to inherit.

Talk to Your Parents About Estate Planning and Long-Term Care

If you live in a state with filial responsibility laws (or even if you don’t), it’s important to have an ongoing conversation with your parents about estate planning, end-of-life care and where that fits into your financial plans.

You can start with the basics and discuss what kind of care your parents expect to need and who they want to provide it. For example, they may want or expect you to care for them in your home or be allowed to stay in their own home with the help of a nursing aide. If that’s the case, it’s important to discuss whether that’s feasible financially.

If you believe that a nursing home stay is likely then you may want to talk to them about purchasing long-term care insurance or a hybrid life insurance policy that includes long-term care coverage. A hybrid policy can help pay for long-term care if needed and leave a death benefit for you (and your siblings if you have them) if your parents don’t require nursing home care.

Speaking of siblings, you may also want to discuss shared responsibility for caregiving, financial or otherwise, if you have brothers and sisters. This can help prevent resentment from arising later if one of you is taking on more of the financial or emotional burdens associated with caring for aging parents.

If your parents took out a reverse mortgage to provide income in retirement, it’s also important to discuss the implications of moving to a nursing home. Reverse mortgages generally must be repaid in full if long-term care means moving out of the home. In that instance, you may have to sell the home to repay a reverse mortgage.

The Bottom Line

elderly woman in a wheelchair outsideFilial responsibility laws could hold you responsible for your parents’ medical bills if they’re unable to pay what’s owed. If you live in a state that has these laws, it’s important to know when you may be subject to them. Helping your parents to plan ahead financially for long-term needs can help reduce the possibility of you being on the hook for nursing care costs unexpectedly.

Tips for Estate Planning

  • Consider talking to a financial advisor about what filial responsibility laws could mean for you if you live in a state that enforces them. If you don’t have a financial advisor yet, finding one doesn’t have to be a complicated process. SmartAsset’s financial advisor matching tool can help you connect, in just minutes, with professional advisors in your local area. If you’re ready, get started now.
  • When discussing financial planning with your parents, there are other things you may want to cover in addition to long-term care. For example, you might ask whether they’ve drafted a will yet or if they think they may need a trust for Medicaid planning. Helping them to draft an advance healthcare directive and a power of attorney can ensure that you or another family member has the authority to make medical and financial decisions on your parents’ behalf if they’re unable to do so.

Photo credit: ©iStock.com/Halfpoint, ©iStock.com/byryo, ©iStock.com/Halfpoint

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Source: smartasset.com

How Tapping Home Equity Can Pay the Taxes on a Roth IRA Conversion

Single Family Home with Beige Clapboard Exterior and Trees in Autumn Colors (Foliage) in Sleepy Hollow, Hudson Valley, New York. OlegAlbinsky/iStock

The benefits of incorporating a Roth IRA into your retirement strategy are often praised by financial advisers, citing the ability for money to grow tax-free for decades and provide tax-free income in retirement. While a Roth IRA conversion is one way to take advantage of this savings tool, the tax implications of converting investments from a traditional retirement account to a Roth IRA typically deter most people. Yet the effects of new legislation and persistent market volatility make a Roth IRA conversion worth considering, and paying for it doesn’t have to break the bank.

A Roth IRA conversion uses assets from a traditional or rollover IRA, 401(k), SEP or Simple IRA to fund a Roth IRA. Unlike regular contributions to a Roth IRA, which are constrained by income limitations and annual contribution caps, there are no restrictions when converting retirement assets to a Roth IRA. Any amount can be converted regardless of your age, income, or employment status. But the Roth IRA conversion doesn’t come without a cost.

When you convert pre-tax assets in a traditional retirement account to your Roth IRA, the conversion is treated as income and you must pay taxes on the assets converted. The amount you pay in taxes depends on your income tax bracket for the year. In some cases, a substantial conversion in one year could boost taxable income by multiple brackets. To help manage that liability, a series of partial conversions over several years could be planned to keep the distributions within a targeted tax bracket.

For many retirees, income from a traditional IRA or 401(k) can create a tax headache, especially when required minimum distributions (RMDs) raise their tax bracket. That’s where a Roth IRA comes in.

A Roth IRA provides the flexibility to take tax-free withdrawals in retirement when you want and in whatever amount you want. This is unlike other retirement accounts that have RMDs beginning at age 72. The RMDs are taxable income, which means that in addition to your tax bracket they can also impact your Medicare premium bracket and the taxation of your Social Security benefit, whereas distributions from the Roth IRA will not.

This year the CARES Act temporarily pauses RMDs from traditional retirement accounts. So, if you are 72 or older and you don’t take your RMD then your income will be lower. This provides a potential opportunity to make a larger conversion while maintaining the same income tax rate.

Additionally, since the Secure Act of 2020 eliminated the stretch provisions for inherited retirement plans, the Roth IRA is also a great estate planning tool. Non-spousal heirs can no longer take distributions over their life expectancy, but rather all distributions must be taken within 10 years. While this is true as well for an inherited Roth IRA, the distribution would not be a taxable event.

The cost of an IRA conversion can be daunting, but it doesn’t have to be. Conventional wisdom is to pay the resulting tax bill with non-taxable assets from outside the retirement plan. Using plan assets would defeat the purpose of the conversion as you will permanently give up a portion of the capital that is accumulating on a tax-free basis. In addition, if you’re under age 59 ½, the portion of plan assets used to pay for the conversion could also be subject to a 10% tax penalty.

If you have the cash on hand, that’s likely the best way to cover the tax implications. But depending on the size of the conversion and your tax bracket, the up-front costs could be significant. Another option is to take out a loan against your life insurance policy. While this permanently reduces the policy value if not repaid, the loan doesn’t count as taxable income so long as the policy isn’t surrendered, doesn’t lapse, and the amount owed doesn’t exceed the premiums paid. If any of these do occur then the tax implications will likely be even larger than the taxes paid on the Roth IRA conversion.

Considering a reverse mortgage

Alternatively, tapping into your home equity can provide the means to pay the taxes. You could leverage current low interest rates and get a home equity line of credit (HELOC), though many banks have stopped accepting applications for HELOCs in recent months. Additionally, a HELOC will require a monthly mortgage payment, decreasing your cash flow.

For homeowners age 62 or older, a reverse mortgage could pay the tax liabilities from the Roth IRA conversion, creating tax and cash-flow flexibility and potentially a higher net worth.

With a reverse mortgage, the available line of credit grows and compounds at a value that is tied to current interest rates. This can be particularly beneficial with a series of partial Roth IRA conversions as it provides a growing resource to pay future tax bills. The line of credit also provides flexibility to convert a greater portion of your retirement assets during market plunges, so you only pay taxes on the lower value at the time of the conversion and not on any gains in the Roth IRA when the markets recover.

Since there are no principal or interest payments required for as long as you live in your home, the line of credit from a reverse mortgage provides the liquidity to pay for the Roth IRA conversion with no impact on household cash flow or the need to sell other invested assets.

A good rule of thumb is to use a reverse mortgage if your home equity is less than or equal to the value of the retirement assets you plan to convert. If the home represents a major portion of your net worth, a reverse mortgage may not be the best option to cover the tax bill. In this case, the reverse could better serve as a tax-free source of supplemental income, or to pay for in-home care, or other retirement expenses that distributions from the smaller invested assets may not be able to cover.

Evaluating the use of a reverse mortgage also depends on the projected costs in comparison with the projected returns. For example, if interest rates on a reverse line of credit are at 3%, and your home appreciates at a 3% rate, you could borrow 50% of your home equity and still maintain a 50% retained equity position throughout the duration of the loan. Even if the home only appreciated at a 1% rate, you would still have a retained equity position.

Projected returns on the Roth IRA conversion would also need to be evaluated. For simplicity’s sake, let us assume you borrow a total of $250,000 from your reverse line of credit to pay the tax bills on $1 million conversion. If you accrue interest on the line of credit balance at a 3% rate and the Roth IRA grows at a 6% tax-free rate, the return could be quite compelling over time.

Of course, there are no guarantees on any projections, which is why you should consult a financial professional and evaluate your specific situation. A number of “what if” scenarios should be considered including changes in interest and tax rates, home and investment growth rates, and legacy desires. These considerations will help determine if using a reverse mortgage to take advantage of the benefits of a Roth IRA conversion could be a retirement strategy that makes sense for you.

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Source: realtor.com