Shared from the 7/30/2017 Philadelphia Inquirer - Philly Edition eEdition

THE MORTGAGE PROFESSOR

Arranging reverse-mortgage spousal benefits

‘I am 75 years old, my wife is 56, and our home is worth $400,000. Our equity in the house will be her main financial resource when I have departed. She wants to live in our home until the end. What is the best way to use a reverse mortgage to meet her needs after I’m gone?”

A great question pertaining to a common situation. The U.S. Department of Housing and Urban Development changed the rules a few years ago to provide occupancy protection to nonborrowing spouses (NBS). Before, the younger nonborrowing spouse had to vacate the house when the borrowing spouse died. Today, an NBS can remain after the borrower’s death but cannot draw any funds from the borrower’s reverse mortgage. How, then, does the borrower arrange to meet the financial needs of the NBS? Here are two cases: one in which the need is immediate and one in which the need won’t arise for six years, when the spouse turns 62.

The immediate need

Your wife won’t be eligible for a home equity conversion mortgage —the federal government’s reverse mortgage program — until she is 62, so to meet an immediate need for funds, you must take out the HECM as the sole borrower, with your wife as a NBS. There are two possible ways to use the HECM to generate income immediately. One way is to draw a tenure monthly payment, which will continue as long as you live in the house. Based on your ages and the $400,000 value of your house, the monthly payment at current interest rates would be about $1,000.

The major drawback of this approach is that when you die, the payments would stop, and there is no way to start them again until your wife is 62.

To start the flow of payments again, your wife would have to refinance when she became 62, repaying the balance on the existing HECM in order to draw funds on a new HECM.

The second approach avoids the cessation of payments on your death and the need for your wife to refinance on reaching 62. You take out the HECM as before, but instead of drawing a monthly tenure payment, you take a credit line, which you use immediately to purchase a lifetime annuity on your wife from a highly rated life insurance company. You could draw a credit line of about $187,000, which would purchase a lifetime annuity on a woman of 56 of about $890. It’s a little smaller than the tenure payment, but it doesn’t stop with your death and it doesn’t stop if your wife moves.

If your need is immediate, I would favor the second approach because it avoids the risk that your untimely death would eliminate payments to your wife for up to six years.

The need is deferred

There are three possible approaches to generating a future flow of income. The first approach is a variation of drawing a HECM credit line now and using it to purchase a life annuity on your wife. The difference is that the annuity you purchase is deferred rather than immediate. A lifetime annuity on a female of 56 with payments deferred for six years would be about $1,230, as compared to the $890 on the immediate annuity.

The second approach is to do nothing until your wife hits 62. Assuming you are still alive at that point, you would take a HECM as co-borrowers. If you die before she hits 62, she would take the HECM as the sole borrower. The amounts that can be drawn will be the same in both cases, because when there are co-borrowers the age of the younger one is used to determine draw amounts. Assuming that your house appreciates by 4 percent a year and that interest rates remain where they are now, after six years you will be able to draw a tenure payment of about $1,450 a month for as long as either of you resides in the house.

The third approach is for you to take an HECM credit line now as the sole borrower, with your wife as an NBS, holding it unused for six years. Unused lines increase by the amount of the interest rate plus the mortgage insurance premium. At current rates, after six years the line would be about $260,000. That could purchase a monthly tenure payment of about $1,480, or an immediate life annuity of about $1,240.

Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania. http://www.mtgprofessor.com.

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