With an estimated 10,000 seniors per day, reaching the age of 65, Baby Boomers are looking for creative ways to fund their retirement years. The average family, between the ages of 56 and 61, only has savings account balances of $163,577, creating a significant financial shortfall when it comes to funding retirement. To make up the shortfall, families are looking for out-of-the-box solutions that can keep them in their home as long as possible.
In some cases, a reverse mortgage can become a valuable financial resource in retirement.
What is a Reverse Mortgage Loan?
A reverse mortgage is available to homeowners 62 and older with a large amount of equity in their home. The lender estimates the home’s current market value, subtracts the value of any existing liens, allowing the homeowner to convert the equity into cash, without requiring immediate loan repayment.
The program helps retired individuals with limited income to use their home equity to cover monthly living expenses and pay for health care. The lender does not place restrictions on how you use the funds received from a reverse mortgage.
A reverse mortgage can be a key element of retirement planning for those with inadequate savings. As with all bank products, there are both advantages and disadvantages of the program. To determine if a reverse mortgage is the best option for you, consider the following pros and cons of a reverse mortgage loan.
Improved Cashflow: Eliminating the mortgage payment in retirement is the main draw of a reverse mortgage. It can preserve limited savings for other living expenses.
Pays Off Any Existing Mortgage: The initial payment must pay off any existing mortgage, leaving you without a mortgage payment. The new lender maintains a lien on the property.
Minimal Out of Pocket Expenses: You can use funds from the reverse mortgage to pay ongoing fees, closing costs, or the Federal Housing Administration Mortgage Insurance Premium, eliminating out of pocket costs.
Easy to Qualify: Unlike a traditional mortgage, lenders rely heavily on the home’s value, rather than income and credit scores, allowing a larger number of seniors with limited means to qualify.
Age in Place: The provisions of a reverse mortgage allow you to remain in the home the rest of your life, with no repayment requirements. The bank decides on the amount of equity you can receive based on the age of the youngest person. Provided you remain in the home, you will not have to repay the loan.
You Maintain Ownership of The Home: You may remain in the home until you sell or vacate the home. Rather than make monthly payments, the bank receives repayment at the time of the sale. As the owner, you must maintain the home, which includes paying property taxes, insurance, and any applicable homeowner association dues. You can get out of the reverse mortgage by repaying the loan.
Multiple Funding Options
You can determine how you receive funding. Choose between:
- Lump sum
- A Line of credit to tap as needed
- A continuous stream of income for a set period or as long as you live in the home
You can combine funding options based on your needs. Individuals who choose a lump sum payment receive a fixed rate loan. When funding mirrors a line of credit, there is a variable rate attached to the debt.
Equity is Not Considered Taxable Income: In most cases, the IRS does not tax the loan proceeds.
No Impact on Medicare And Social Security: A reverse mortgage does not impact qualifications for Medicare and Social Security.
Heirs Are Not Personally Liable for Mortgage: When you no longer reside in the home, the lender will repay the loan through the proceeds. In the event the sale does not fully repay the mortgage, heirs are not responsible for the difference.
Can Increase Amount Available, Over Time: An increase in your home’s value, can raise the amount of cash available.
Inheritance: At the time of the sale, any remaining equity belongs to you or your heirs.
High Fees: Fees associated with a reverse mortgage are much higher than a traditional mortgage.
Low Value: The lender will ensure the loan balance does not rise above the home’s future value. To determine the amount of equity you qualify to receive, the lender considers the market, the current value of the home, the age of the youngest person on the loan, and life expectancies. After paying off existing loans and estimates on accumulated interest and fees, the equity available for a reverse mortgage can be much lower than the actual value.
Rising Loan Balance: The loan balance will increase over time as the interest and fees accumulate.
Fewer Assets Available to Leave Your Heirs: As you convert the home equity to cash, there is less value for heirs to inherit.
Can Affect Need-Based Government Programs: A reverse mortgage can affect qualifications for Medicaid or Supplemental Security Income (SSI).
Maturity Events to Consider
When a maturity event occurs, you must repay the loan immediately. Maturity events can include:
- Last surviving borrower, or non-borrowing spouse eligible under certain scenarios, passes away.
- The residence is no longer the borrower’s primary home.
- Borrower vacates the premises for more than 12 months due to medical reasons or 6 months for non-medical reasons.
- Inability to pay property taxes, homeowner’s insurance, or properly maintain the home.
How to Decide if a Reverse Mortgage is Right for You
In most cases, a reverse mortgage is an option of last resort. It is an expensive option because of the uncertainty of your lifespan and financial health. The loan charges an origination fee and up-front mortgage insurance, based on the principal lending limit or the property’s appraised value, whichever is less. The loan balance also grows over time reducing equity in the home.
If you do not take 60% or more of the total principal limit at closing or within 12 months of closing, you can lower the cost of initial mortgage insurance premium (IMIP). However, when you pay off an existing lien, the initial draw is often higher than 60%, substantially increasing the IMIP, adding to the loan balance.
Your home is a valuable asset, and there are multiple ways to convert the equity into cash, without selling the home. For some seniors, a reverse mortgage provides a way to eliminate a mortgage payment while allowing you to age in place.
If you are burdened with high amounts of credit card debt and are struggling to make your payments, or you’re just not seeing your balances go down, call Timberline Financial today for a free financial analysis.
Our team of highly skilled professionals will evaluate your current situation to see if you may qualify for one of our debt relief programs. You don’t have to struggle with high-interest credit card debt any longer.