Money Watch, a personal finance column that runs every Saturday, features a financial planner from the National Association of Personal Financial Advisors answering reader questions about saving, protecting and growing your money. To submit a question, e-mail USA TODAY personal finance reporter Christine Dugas at: firstname.lastname@example.org
Q: What is the FHA Home Equity Conversion Mortgage or HECM? It looks like a no-risk situation for someone who qualifies. What’s your opinion about the program, and how is it different from other reverse-mortgage programs?
A: The Federal Housing Administration (FHA) Home Equity Conversion Mortgage (HECM) is a reverse mortgage. So before you get stuck in the differences between a HECM and any other reverse mortgage, the first question you have to answer is, “Should I really be considering a reverse mortgage?”
If you can declare the next four statements as TRUE, then you may be able to justify considering a reverse mortgage:
1. I need cash — monthly, lump sum or randomly.
2. I intend to live in this home indefinitely.
3. I am not concerned about retaining any equity in the home, whenever I depart it.
4. I fully understand and am comfortable with the costs of a reverse mortgage.
The reasons why a reverse mortgage should be an option of last resort in your financial plan are as follows:
• Although the costs have come down tremendously, reverse mortgages are still costly.
• Because of the upfront costs, one must utilize the product for years before the benefits warrant the costs.
• Most heading into retirement do not have adequate assets — or comparable long-term care insurance — to offset the costs of a long-term health care event not covered by Medicare (and there are many). Therefore, the equity in their home is often the “ticket” into a comfortable independent, assisted or nursing care facility. As Tim Donohue of Corridor Mortgage Group told me, “Once the equity of the home has been tapped through a reverse mortgage, it’s hard to get it back, and it is generally needed in the future.”
• Lastly, the optimal retirement plan is one free from debt, not one in which it is designed to perpetually increase.
Do you still want a reverse mortgage? If so, the decision between a HECM and a proprietary reverse mortgage funded by a private lender has become relatively moot for all new reverse mortgage prospects. According to Andy Quintilian and Ryan McCarty of Atlantic Home Equity, the FHA HECM program is “the only reverse mortgage available in the market today” (as of Dec. 29, 2012).
The vast majority of outstanding reverse mortgage are indeed HECMs, and this is because they are insured by the FHA. This insurance guarantees that you will receive the payments — without risk of the default of a private lender — and that the borrower will be able to stay in the home even if the mortgage payments exceed the value of the home at a later time.
The price of that peace-of-mind is upfront and annual mortgage insurance premiums (1.25% of the balance). Additionally, HECMs can only be levied against primary residences and are capped at $625,000.
There are many knowledgeable and well-intended mortgage representatives (and more than a handful who are neither) who have seen the reverse mortgage open up an entirely new market that previously did not exist.
And because they are typically compensated when you use their products and not when you don’t, you must be cautious and weigh their advice carefully.
It is best that you confirm your direction with a third party, like a fee-only financial planner (but only one who is knowledgeable on the subject), who can give you some conflict-free guidance.
Tim Maurer, NAPFA-Registered Financial Advisor