Managing a HECM reverse mortgage when one spouse is significantly older than the other
Q. 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 HECM reverse mortgage to meet her needs after I'm gone?
A. A great question pertaining to a common situation. HUD changed the rules a few years ago to provide occupancy protection to non-borrowing spouses (NBSs). Prior to that, the younger non-borrowing spouse had to vacate the house when the borrowing spouse died. Today, a NBS can remain in the house 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? I'll look at the case where the need is immediate, and the case where the need won't arise for 6 years when your wife hits 62.
Your wife won't be eligible for a HECM 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 becomes 62. While she would be able to remain in the house for the rest of her life, as a NBS she could not draw any funds.
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. How much she would be able to draw would depend, among other things, on how long you drew funds before you died, and on changes in the value of your home.
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 to a retirement community or a nursing home.
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 6 years.
There are three possible approaches to generating a flow of income beginning sometime in the future. The first approach is a variation of the last procedure described above where you draw a HECM credit line now and use 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 your house appreciates by 4 percent a year and that interest rates remain where they are now, after 6 years you will be able to draw a tenure payment of about $1,450 a month for as long as either of you reside in the house.
The third approach is for you to take a HECM credit line now as the sole borrower, with your wife as an NBS, holding it unused for 6 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. The advantage of this approach is that you would profit from interest rate increases over the next 6 years, which are likely. The downside is that if you die before drawing on the credit line, your wife would have to refinance when she hit 62.
In assessing these approaches I have no general preference, they all work but some borrowers offered the options will be more comfortable with one approach while others will be more comfortable with a different approach. Borrowers looking for help on my website will be guided to the approach that makes the most sense for them.
• Contact Jack Guttentag via his website at mtgprofessor.com.