In recent years, the reverse mortgage has made its way into discussions of retirement and financial decision making across the country more than ever before. Although we have seen some controversy arise through lists of pros and cons, and even possible scams that have been warned against by the U.S. Department of Housing*, don’t shy away from learning about your options with a reverse mortgage. A reverse mortgage might be the right financial tool to meet you, your loved ones, or your clients’ financial goals for an awesome retirement.
Many American’s buy a home as an investment with the hope that its value will increase over the years. Older American’s are finding it harder to make sure that the investment in their home actually pays off. With a reverse mortgage, there may be a way to cash in on the increased value of your home, without having to move out of it. If it is the wish of you or your loved one to stay in your home through retirement, you’ll definitely want to keep reading.
Simply put, a reverse mortgage involves taking the accumulated cash value out of a home in the form of a loan and spreading the loan payments over the future so that the borrower has the necessary cash flow to enable them to continue to live in their home*. Instead of making a monthly payments on your mortgage, you will be the one receiving the payments to use as you please under specific guidelines. This is a great way to supplement retirement income, cover costs of necessary home renovations, or pay for medical expenses that may come with age.
Here are three ways a reverse mortgage can be used to help provide additional retirement security.
1. Delay Social Security Benefits and Let Investments Grow
“Determining when to take Social Security is one of the most important decisions a retiree makes because it’s lifetime income. So, if you can use reverse mortgage proceeds to delay taking Social Security benefits as long as possible, that can provide you with greater monthly income” - Barbara Howard**
2. Protection from Investment Downturns
A reverse mortgage can be established at the beginning of retirement to help minimize investment portfolios. It can supplement monthly income during portfolio downturns due to market corrections or recessions. A reverse mortgage may allow you to preserve your investment portfolio longer during retirement**.
3. Grow Retirement Funds with the HECM Growing Line of Credit
When applying for a reverse mortgage you get to decide how you want to receive the funds. One option is a line of credit, that is left to grow at an interest rate that is equal to current loan rates. This line of credit also includes a compounding feature so that available credit increases each period on the prior period’s available credit balance. At any time, the line of credit can be accessed for incidental cash or even converted to monthly term or tenure payments**.
Who is eligible for a reverse mortgage?
The first and most important determinant of eligibility is that the primary homeowner must be age 62 or older. Other requirements include
Any existing mortgage you have must be paid off using the proceeds from your reverse mortgage.
You must live in the home as your primary residence.
You must remain current on property taxes, homeowners insurance and other mandatory legal obligations, such as homeowners association dues.
You must participate in a consumer information session led by a HUD-approved counselor.
You must maintain your property and keep it in good condition.
How much does a reverse mortgage cost?
The closing costs for a reverse mortgage aren’t cheap, but the majority of HECM mortgages allow homeowners to roll the costs into the loan. This option does, however, reduce the amount of funds available to you through the loan.
According to HUD, here are some HECM fees and charges**:
Mortgage insurance premiums (MIP): 2% initial MIP at closing, as well as an annual MIP equal to 0.5 percent of the outstanding loan balance. The MIP can be financed into the loan.
Origination Fee: To process your loan, lenders charge the greater of $2,500 or 2% of the first $200,000 of your home’s value, plus 1 percent of the amount over $200,000. The fee is capped at $6,000.
Servicing Fees: Lenders can charge a monthly fee to maintain and monitor your loan, for the life of the loan. These fees cannot exceed $30 for loans with a fixed rate or an annually adjusting rate, or $35 if the rate adjusts monthly.
Third-party fees: Third parties may charge their own fees such as for the appraisal and home inspection, a credit check, title search and title insurance, or a recording fee.
Many people are skeptical when it comes to a reverse mortgage because they aren’t the ideal financial choice for everyone. However, the can be a great option if you will get enough proceeds from the loan to solve your long-term financial problems, if you plan to stay in our home long term, if you can afford the ongoing costs of homeownership, if you have a spouse who is 62 or older and/or if you don’t plan to leave your home to anyone.