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.

A 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?

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