America's Secret Boomer Savings Account
Many Americans have the biggest portion of their net worth tied up in primary residences. So when it comes time to retire, they consider various ways to tap that wealth.
Selling (and then downsizing) is one option. Various rental strategies are another.
But today, I want to explore a third choice that many people ask about — reverse mortgages.
A reverse mortgage lets homeowners age 62 and older convert their home’s equity into cash.
It allows borrowers to retain the title and ownership of their home while continuing to live in it. However, they’re still responsible for repairs, property taxes, insurance, and any other expenses on the property.
The proceeds from a reverse mortgage can be paid out all at once … as a fixed monthly income over your lifetime … as an ongoing line of credit … or as a combination of these options.
The loan must be paid back with interest when you die, sell the home, or permanently move out. But you or your heirs will have the option to pay off the reverse mortgage at any time and keep the house. And the amount that must be repaid can never exceed the value of the home.
Furthermore, if the sales price exceeds the amount owed, the excess will go to you or your estate.
It’s important to note that the home must be your primary residence, meaning you must live there at least 183 days per year. And your home must meet HUD standards. If it doesn’t, part of the loan will be set aside to pay for needed repairs.
The size of a reverse mortgage depends on several factors, including:
⇒ The youngest homeowner’s age
⇒ The home’s value
⇒ And current interest rates
The money you receive is tax-free and does not affect Social Security or Medicare benefits. But, it could influence Medicaid qualification.
You can use the money from a reverse mortgage anyway you wish.
For example, it could be used to pay healthcare expenses …
Let’s say you’re married and your spouse needs long-term care. With a reverse mortgage, you can continue to live in your house while your spouse receives needed care in a nursing facility or at home.
To see how this would play out, here’s a hypothetical situation …
Ozzie and Harriet are ages 64 and 62, respectively.
They own their home, which is valued at $250,000. Health problems have prevented either from obtaining long-term care insurance.
Harriet needs in-home care after falling off a ladder and breaking her leg in two places but the couple doesn’t have the money to pay for this type of care.
A reverse mortgage offers Ozzie and Harriet the following three choices:
- Single lump sum of $127,529
- Line of credit equal to $127,529
- Lifetime monthly income of $650
They could pick whichever made the most sense for them.
You can also use a reverse mortgage for other retirement purposes …
For example, many seniors are using reverse mortgages to pay off their existing mortgages.
In some cases, it’s to lower their monthly expenses.
This strategy has become more common in recent years because of the rise in housing debt …
According to a study by Fannie Mae, a higher percentage of Baby Boomer retirees are saddled with mortgage debt than retirees born between 1931 and 1935. And a MetLife Mature Market Institute survey found that boomers ages 62 to 64 represent 20% of prospective borrowers as they enter retirement.
Of course, some savvy retirees are even using reverse mortgages to fund other new retirement home purchases.
The reality is that there are a lot of different ways to use reverse mortgages and you’ll have to do more research to decide whether one is right for you.
Here are just a few of the things to watch out for …
The lender will charge a host of fees, which are capped and may be financed as part of the reverse mortgage.
They can include:
- Origination fee — Covers the lender’s operating expenses associated with your reverse mortgage.
- Mortgage insurance premium — Protects you and the lender against default.
- Appraisal fee — Needed to place a value on your home.
- Closing costs — Credit report, escrow, etc.
- Servicing fee — Ongoing administration of the loan.
- Interest — You are only charged interest on the money you receive. This interest is taken out of the proceeds when the house is sold.
There are also several additional pitfalls, including things like …
- If you repeatedly miss paying insurance premiums or property taxes, or fail to maintain the property, the loan might be revoked. Then the bank could foreclose on your home.
- If you spend all the proceeds, you’ll need a backup plan.
- The loan balance increases over time as interest and fees accumulate. And as you spend your home’s equity, fewer assets are available for your love ones. You can still leave them your home, but they’ll have to repay the loan balance.
- Plus, anyone other than your spouse living with you, for example an adult child, could end up without a place to live if you move or die.
The bottom line is that a reverse mortgage is a certainly a tool that can be used to solve certain money problems.
However, it is not a cure-all, regardless of what the smiling spokesmen on TV tout.
So take your time … understand the possible risks … the “what ifs” … and how you’ll deal with them before signing on the dotted line.
For more information on reverse mortgages, including how to find a lender, one source you might check out is the National Reverse Mortgage Lenders Association.
To a richer life,
for The Rich Life Roadmap