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When is a HECM beneficial for couples with a spouse under 62?

[ad#Take Charge America]Now that FHA will be accommodating younger spouses under the age of 62 this August, it behooves us to examine the impact on our market. Here are just a few scenarios where couples with a spouse under 62 may benefit or should avoid taking a reverse mortgage.

reverse mortgage newsA Better Fit

Income Security:

The husband is over 62 and wishes to offset reduced household income for his younger wife. Their are two areas where married couples incur substantial risk of seeing their future income reduced when one spouse passes away: Social Security and pension benefits. Generally speaking the surviving spouse receives the equivalent of the larger Social Security monthly benefit but forgoes the smaller check. Also pension survivor benefits range from zero to seventy-five percent of the original benefit. In this case the husband can secure future proceeds (although smaller due to the younger spouse) to ensure his wife can meet ongoing living expenses.

The Tax Crunch:

Qualified account withdrawals. Couples who find themselves strapped for cash may be tempted to access funds from qualified accounts early. Early withdrawals from IRAs and other retirement prior to age 59 1/2 may be subject to a 10% tax penalty plus the entire withdrawal is treated as taxable as income.. By utilizing a HECM line of credit or tenure payment couples may be able to defer taking withdrawals until  age 60 or later both avoiding the tax penalty and allowing their nest egg to grow a few more years.

Better to Wait?

Deferred Line of Credit & Interest Rate Risk:

Client does not need money for several years and has little concern of future income for their spouse.. Since the principal limit will be based on the age of the younger spouse it may be more ideal for the couple to wait until both reach the age of 62 or a clear need is present. Even though the line of credit grows each month the benefits of waiting may exceed the future growth in the line of credit. One caveat. We have historically low interest rates and waiting until rates are higher may reduce the available funds below that which they would have received even with a spouse under the age of 62. This requires a full and complete discussion where your borrowers can weigh the risks and benefits alike.

Marital Uncertainty:

Marriage is uncertain proposition, even for older couples.. If the prospective borrower’s marriage is on shaky ground any benefit of including the younger spouse may be eliminated by a divorce. In such cases it is wise to wait. As reverse mortgage professionals we never ask about the current state of marital bliss, but if the issue is brought up by either party we must inform them of the long term consequences that a divorce would create.

FHA’s new considerations for younger spouse opens countless opportunities but also requires another level of due diligence on our part. What are your thoughts? What considerations do you see for couples with one spouse under the age of sixty-two?

Download a PDF of this blog post here.

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Editor in Chief: HECMWorld.com
 
As a prominent commentator and Editor in Chief at HECMWorld.com, Shannon Hicks has played a pivotal role in reshaping the conversation around reverse mortgages. His unique perspectives and deep understanding of the industry have not only educated countless readers but has also contributed to introducing practical strategies utilizing housing wealth with a reverse mortgage.
 
Shannon’s journey into the world of reverse mortgages began in 2002 as an originator and his prior work in the financial services industry. Shannon has been covering reverse mortgage news stories since 2008 when he launched the podcast HECMWorld Weekly. Later, in 2010 he began producing the weekly video series The Industry Leader Update and Friday’s Food for Thought.
 
Readers wishing to submit stories or interview requests can reach our team at: info@hecmworld.com.

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3 Comments

  1. Now, don’t take me wrong. I’m just putting this out there as food for thought. I grew up in rural America and was driving tractors, trucks and cars when I was 13. I could not get a license to drive, however, until I was 16. I was also excited when my dad took me out on my 21st for a ceremonial ” 1st drink”. It was the 1st legal one I had ever had as 21 was, and still is, the legal age in MD. As you can see, there are many things in life that one becomes eligible to do at certain ages. A reverse mortgage is one of those things that was, by design, an eligible event when turning age 62. 62 was looked at as an early retirement date back in 1989. People were expected to continue employment until retirement. Are we seeing where I am going with this? Does it make sense or shall we try and find some new ways to abuse a terrific program designed for SENIORS?

  2. There is a lot of false information about taking distributions before age 59 and 1/2 out of an IRA or qualified retirement plan. If a couple needs an amount of monthly income which is less than or equal to an acceptable annuitized amount allowed by the IRS, the distribution will be taxed but will not be subject to the early withdrawal penalty. This is an area for experts in income tax matters to help structure.

    Social Security must also be looked at carefully. Deferring benefits today to gain larger benefits in the future may sound like a good idea, but beneficiaries need to look at the risk of loss due to borrowing especially if death occurs during the payback period. The risk is much higher for those who are not married for Social Security purposes than for married couples. Again this is an area for experts in the field to evaluate.

  3. Perhaps this is a scenario worth considering. An age qualified borrower with a medical history that could make the cost of life insurance prohibitive or unavailable could under the new proposal preserve the family home for the younger spouse.


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