Are you comfortable with your investment strategies? Are you prepared to live on a budget? Have you saved enough? If not, it may be worth looking into a reverse mortgage. Many retirees find they can take advantage of a reverse mortgage as a financial planning tool.
A couple of decades ago, reverse mortgages were the ugly stepsister of mortgages, a loan of last resort for retirees who badly needed money. That is no longer the case. With a reverse mortgage, homeowners 62 and older can borrow against the value of their home or purchase a new home. The loan and the interest on the money taken out come due when the last surviving borrower or eligible nonborrowing spouse dies sells the house, or leaves for more than 12 months (i.e., enters an assisted living facility).
Most reverse mortgages are Home Equity Conversion Mortgages, or HECMs, which the Federal Housing Administration insures. The loan is “nonrecourse,” meaning the F.H.A. guarantees that a borrower will never owe more than the property’s value when the loan is repaid.
In exchange for that guarantee, borrowers pay an initial mortgage insurance premium to the F.H.A. based on the home’s appraised value which could run up to $19,400. An origination fee to the lender could top out at $6,000, and the lender charges closing fees typical for any mortgage loan. These upfront costs can be paid with cash from other sources or with proceeds from the reverse mortgage and repaid later with interest.
One thing to note is that when you apply for a reverse mortgage, you’re required to take the maximum amount you are eligible for. Still, the money you do not use immediately. Only the money pulled from the account is charged interest, known as the loan balance.
So why would you need a reverse mortgage?
Delay Social Security
Delaying Social Security is a great way to extend retirement funds. Waiting until your full retirement age (66) to take your Social Security benefits results in a benefit amount about 30% higher than if you start taking benefits at age 62. Suppose you wait until age 70; the benefit is another 32% higher. Taking advantage of a reverse mortgage helps delay the use of Social Security. This option allows you to get your immediate need for cash, and your Social Security benefits can continue growing.
Purchase a smaller home
Many baby boomers sell their homes to move into smaller homes, condos, or retirement communities. Although challenging to consider, downsizing is an effective way to add money to your savings while eliminating the stressors of high mortgage payments and ongoing home maintenance. But how does a reverse mortgage come into the conversation? Through a reverse mortgage purchase loan, you can combine proceeds from the previous residence sale with reverse mortgage funds within a single transaction.
Pay for in-home care
On average, 70 percent of Americans over age 65 will need some form of long-term care services and support during their lives. A reverse mortgage can help generate extra cash for occurring costs. Care costs will vary depending on whether you need assistance with daily living or instrumental activities of daily living.
Pay off high-interest debt
Credit card interest rates are in the upper teens. Carrying a credit card balance is an extreme disadvantage that can slowly deplete your savings. An easy way to take care of it is by considering the ability to access tax-free cash through a reverse mortgage loan to pay off your credit cards.
There are many uses and benefits to a reverse mortgage. If you have questions and want to know if a reverse mortgage is something you should be considering, contact us today.
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