A reverse mortgage can be used to refinance your existing home or purchase a new one. This article will address refinancing using a reverse mortgage on an existing home. You’ve worked long and hard to build your nest egg. Take the time to look at every available option to ensure your retirement assets are used in the most profitable and efficient way. Reverse mortgage financing can provide additional funds in retirement, and, in addition, prevent the depletion of your other assets, allowing for maximum performance of your portfolio.
Today’s reverse mortgage has a variety of options, lower costs and additional consumer protections in place to provide you and your family with more confidence for your retirement security. HECM (home equity conversion mortgage) reverse mortgages offer a line of credit that you can tap into when you need it—the unused portion of your line of credit actually grows every month! You have the option to convert, at any time, to annuity-style monthly payments for a period of time, OR for the rest of your life; or you can just build in additional security and use it as a rainy-day account. Immediate cash flow can be created by paying off an existing mortgage loan. A reverse mortgage is now a versatile, safe and effective retirement planning tool to meet a variety of needs.
Just what exactly is a reverse mortgage?
A reverse mortgage is a way for borrowers age 62 or older to purchase a property or unlock the equity in their home by turning it into tax-free cash (consult with your tax advisor) without having to make any monthly mortgage payments (real estate taxes and insurance must still be paid). How do you qualify?
1. The borrower on title must be 62 years or older (a non-borrowing spouse may be under age 62).
2. The home must be the borrower’s primary residence.
3. The borrower must own and live in the home as a primary residence.
4. Borrowers must continue paying property taxes and homeowner’s insurance, maintain the home and otherwise comply with the loan terms.
Developing Your Reverse Mortgage Retirement Plan
You need to ask yourself the following questions: How much money will you need in retirement to cover your expenses? What income sources and retirement assets do you have available that can help fund your retirement? How will your retirement savings generate income to cover your expenses? What savings withdrawal rate will be sustainable throughout your retirement? When do you want to retire? What do you want to do when you retire?
Traditional IRA and Roth 401(k) investment retirement accounts can be subject to taxation and may increase your tax liability once you start taking distributions. Examine your current retirement savings and consider additional benefits you expect to receive during retirement like pensions, Social Security benefits, etc. You can then analyze and review your current asset allocations, expected retirement income and estimate how long your savings will last.
Evaluating Your Options
You might find that you are not on track to achieve your retirement income goals and that you may need to increase your savings or retirement plan contributions. If these are not viable options and you would like to achieve your retirement goals or maintain your lifestyle, a reverse mortgage could be the perfect solution.
Consider your options. There are various retirement income solutions that may fit you. Your plan can include using retirement plan savings, investment options like CDs or mutual funds, and even leveraging your home’s equity through a HECM reverse mortgage line of credit.
Strategic Uses of a Reverse Mortgage for Retirement Planning
1. Delay Social Security benefits and let investments grow. Using this approach, a reverse mortgage is established at the outset of retirement and drawn upon every year to provide retirement income until exhausted, allowing the retiree’s portfolio, such as a 401(k) plan, more time to grow. Subsequent withdrawals are then made from the portfolio. This strategy also enables the retiree to delay accessing Social Security benefits, increasing their monthly payments later in life.
“Using a reverse mortgage to delay taking Social Security is a very powerful tool. Determining when to take Social Security is probably 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 for as long as possible, that provides you with greater monthly income.” Barbara Howard, Professor, Gerontology
For example, Sarah is a 62-year-old homeowner who wants to let her investment portfolio grow and delay using her Social Security benefits. She gets a reverse mortgage on her $350,000 home and qualifies for an estimated loan of $100,605. She then elects to receive monthly payments of about $1,000 until she turns 70 years old. If Sarah decides to receive her Social Security benefits at age 62, she would have received an estimated lifetime monthly benefit of $1,016. **By using a reverse mortgage to help delay her Social Security until age 70, she is now eligible to receive a monthly benefit of $1,789, almost double what she would have received at age 62.
**The example is based on a borrower age 62, a fixed interest rate of of 5.06 percent and an annual percentage rate of 6.88 percent. Actual lender rates and other charges may vary. Social Security benefits calculator from www.bankrate.com/calculators/ retirement/social-security-benefits-calculator.aspx
2. Protection from investment downturns. Using this second approach, a reverse mortgage is established at the outset of retirement but only drawn upon if the portfolio underperforms. The need to use the reverse mortgage funds is determined based upon investment performance, which may spare the portfolio any drain when it is down, giving it a better chance to recover. Also, when withdrawal rates then begin to draw further on the portfolio principal, this may lessen opportunity for further growth on the remaining portfolio. A reverse mortgage may help minimize risk in retirement during your investment portfolio’s volatility cycles. If your portfolio is in a downturn due to market corrections or recessions, and you continue to draw on it, there is a higher probability of exhausting it during retirement. Instead of drawing on your portfolio during the “trough periods,*” you can use a reverse mortgage to supplement your monthly income, allowing your investment portfolio time to recover.
3. Grow retirement with the HECM growing line of credit. A line of credit can be established using a HECM reverse mortgage and is left to grow at an interest rate that is equal to the 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, similar to annuity payments.
Using these active strategies, cash reserves are made available upfront and incorporated into a plan, giving your portfolio the maximum amount of time to grow and the best possible chance of survival. You can still live in your home without making monthly mortgage payments, feel confident about being financially prepared for emergencies, have a growing line of credit available to you while improving your Social Security opportunity—all while maintaining your desired quality of life. Simple and effective.
Important Consumer safeguards
There is no prepayment penalty. Although the loan is not due and payable until the last homeowner leaves the home, you can choose to repay the loan at any time without incurring additional costs.
HUD Fee Limitations
HECM loan origination fees are regulated by HUD. Other reverse mortgage costs may vary among creditors and loan types.
Non-recourse Loan HECMs are considered non-recourse loans. Neither you nor your heirs will ever owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt.
Major change! Financial Assessment went into effect April 27, 2015, so there is a more thorough evaluation of borrowers’ abilities to meet the financial obligations of their reverse mortgage loans.
Major change! Non-borrowing spouse is a spouse under the age of 62. New loan amounts are available to borrowers with a non-borrowing spouse under the age of 62. New rules also allow the eligible spouses, under 62 years of age, of borrowers who pass away to stay in the home without foreclosure. The surviving spouse must continue to pay taxes, homeowner’s insurance, home maintenance and otherwise comply with the loan terms.
Counseling HUD requires that all reverse mortgage applicants must undergo independent, third-party counseling. This ensures that borrowers understand the financial implications associated with their reverse mortgage, what their obligations are and what other alternatives may be available to them. We encourage and support third-party counseling so that you feel completely comfortable with the process and understand your options.
Carl Guzman, NMLS# 65291, CPA, is the founder and president of Greenback Capital Mortgage Corp., a Zillow 5-star lender, http://www.zillow.com/profile/Greenback-Capital/Reviews/?my=y.He is a residential financing expert and a deal-maker with over 26 years industry experience. Carl and his team will help you get the best mortgage financing for your situation and his advice will save you thousands! www.greenbackcapital.com [email protected]
By Carl Guzman
