The Reverse Mortgage
AN STATE PLANNING TOOL
Helping mprove Quality f Life
rofessional planners design retirement plans for their customers, and the reverse
mortgage should be considered an integral part of the estate plan. Designed to help
homeowners 62 years and older remain in their homes and enhance their quality of life in
retirement, the reverse mortgage is a nonrecourse loan that releases home equity and
converts it into taxfree income. There are no restrictions on the use of proceeds, the
borrower continues to own the home, and no monthly mortgage payment is required for
as long as the borrower resides in the home.
Whether the goal is to augment income, pay for longterm care insurance or specialized
medical treatment, or enjoy the freedom and choices that help make the retirement years
memorable, unleashing home equity can be the key to a secure and wellplanned
A Reverse Mortgage, as an EstatePlanning Tool, Offers Features That:
Provide funding for healthcare or medical treatment
Provide funding for estate taxes
Maximize legacy asset transfer
Funding for Healthcare or Medical Treatment
With costs for healthcare increasing, even a shortterm illness can significantly impact
any savings or assets saved for those golden years.
The statistics tell us that 40% of the population over 65 will require some form of long
term healthcare services. An average stay in a care facility is about three years and can
easily exceed $50,000 a year. A similar illness treated in the home, supported with in
home health care providers, will average approximately $40,000 per year.
Most Americans recognize the need for a longterm care insurance program to both
protect their assets and relieve any potential burden on their family. Many seniors, when
faced with this situation, are forced to use their savings or impact their monthly income
for longterm care coverage.
A reverse mortgage allows seniors to stay in their homes, be selfsufficient, and not
deplete exist ing savings or income. This seniorbased product provides a borrower easy
access to their home equity built up over the years. Whether they use the funds to
purchase longterm care insurance or pay medical costs directly, the taxfree equity
release helps to protect the other assets in their retirement plan.
Provide Funding for Es tate Taxes
When the taxfree equity release is used to fund life insurance products, a reverse
mortgage is a creative and effective way to secure the future for heirs. It gives
homeowners, particularly those with substantial wealth built up in their homes, the
comfort of having more control over their estate and assuring the legacy they leave
retains its value by:
Lowering the total estate value subject to taxes
Providing life insurance proceeds for the homeowner's heirs to pay estate taxes
How does it work?
The full value of a home owned outright is subject to estate tax, but a reverse mortgage
against the property reduces its valuethus lowering any applicable estate tax. We
recommend you consult your tax estate specialist.
A reverse mortgage is a lien against the property that must be repaid when the borrower
permanently leaves the property. At death, the full value of the property would not be
included in es tate valuation for tax purposes. The accumulated debt of the reverse
mortgage would effectively reduce the property value and may lower any applicable
In addition, accrued interest in the reverse mortgage may be available as a tax reduction
upon repayment of the loan. Consult your tax advisor.
If the senior chooses to purchase insurance without using the equity release of a reverse
mortgage, the buyer is most likely using posttax dollars or income to pay these
However, if the senior uses a reverse mortgage to fund the life insurance product
purchase, taxfree dollars are put to work and the income stream is unaffected.
Maximize Legacy Asset Transfer
A reverse mortgage can provide the senior the comfort of having more control over their
estate and assuring they leave a higher legacy asset for their heirs.
While a home may hold a great deal of emotional value for a family, the reality is that in
most cases, the property is sold after the owner's death, and the assets are liquidated. The
heirs are often forced to sell the property in a volatile real estate market with nor
guarantee of market or value stability. After the sale, which may drag on due to market
conditions, heirs may be faced with inheritance and/or capital gain taxes on the proceeds.
The net proceeds areoften far less than the actual or perceived value of the home.
Using a reverse mortgage to purchase life insurance, this same scenario plays out much
First, the reverse mortgage on the property may lower any amount of estate tax on the
property. Some of the life insurance proceeds could be used to satisfy estate taxes, and
upon sale of the home, the heirs will realize a higher net return.
Second, if the borrower used the proceeds of the reverse mortgage to buy additional life
insurance for their heirs, that purchase would have been made with taxfree dollars.
Regardless of age, the premium paid for life insurance coverage would translate into a
larger death benefit.
When the policy pays the benefit to heirs, they receive taxfree dollars. Upon the sale of
the property, any equity over the loan amount would be subject to taxes, but still revert to
the heirs. With the unknown nature of future real estate markets, this scenario provides
for greater control of the legacy assets by the borrower.
Trends in the Use of Reverse Mortgages
Reverse mortgages are growing in popularityand so are the many ways they can be used
to raise the standard of living for seniors and their families. Most borrowers see this
innovative loan as a mechanism for living in place for as long as possible, and at the same
time accessing extra income to improve their lifestyle.
For the elderly couple whose children have taken jobs across the country, cash advances
from a reverse mortgage can allow them to travel and stay close to family. For the person
who has trouble climbing the stairs of their threestory home, a reverse mortgage may be
a way to pay for renovations that accommodate their needsinstead of being forced to
Leaving the home as a legacy for heirs is becoming increasingly importantmany people
are discovering that a reverse mortgage is a powerful tool in this process.
Business Week Online reported in their April 5, 2001 issue that reverse mortgages could
be considered as a vehicle for additional retirement income and exemplify the rising
interest in reverse mortgages:
If your home is paid up or nearly so, and you're 62 years of age or
older, you can turn your residence into a steady income stream. If the
market decline has sent you or your elderly parents scurrying to find more
retirement income for now or the near future, consider taking out a reverse
mortgage. This ingenious product allows you to convert your home equity
into cold cash, so you can live virtually mortgagefree for as long as you
remain in your house .
A Reverse Mortgage Is Much Different Than a Traditional Mortgage
In fact, think of a reverse mortgage as the opposite of a traditional mortgage. With a
traditional mortgage, the homeowner borrows a large sum of money and makes monthly
payments. As payments are made, the loan balance gets smaller and the equity grows.
In contrast, during the life of a reverse mortgage, the loan balance gets larger while the
equity gets smaller. So, instead of using income to gain equity, the reverse mortgage
borrower is using equity to increase income.
Three Products Mean Versatility and Options
We offer seniors a menu of distinct options for customizing a reverse mortgage that
meets their unique needs. Our reverse mortgage products give senior homeowners access
to the best plan to help them meet their goals:
All reverse mortgage products share similar characteristics and offer similar benefits to
the borrower, including:
The ability to access equity built in the home since its purchase
Cash advances are based on the borrower's age and the home value
No income qualification
The loan is repaid upon a maturity event or permanent moveout and repayment
never exceeds the value of the home.
HUD/FHA Home Equity Conversion Mortgage (HECM) :
Government Insured Program provides cash or monthly income subject to HUD/FHA
lending limits for a fixed term as long as you live in your home.
Fannie Mae Home Keeper:
Government Sponsored Enterprise Program provides cash or monthly income subject to
the Fannie Mae lending limit for a fixed term as long as you live in your home.
Cash Advantage Account for Higher Valued Properties:
Underwritten by Financial Freedom (a subsidiary of Indy Mac Bank) , this product offers 3
distinct solutions for homeowners of higher valued properties and are not limited by the
HUD and Fannie Mae lending limits. Contact your mortgage advisor for all the detains.
Features and Benefits
· Designed for borrowers age 62 years or older
· Virtually no maximum home value or loan limit
· Proceeds/advances are not taxable
· No prepayment penalty
· Loan is nonrecourse
· Servicing fee is automatically financed on the account monthly
· Eligible home types: single family detached, manufactured, condo, PUD, 14
rental unit if one is owner occupied
· Counseling by an independent counselor