PLANNING FOR RETIREMENT?

Mike Cooke January 31, 2017 Buying Improvements Selling

Are you retired or approaching retirement?

Do you have parents or other loved ones in that stage of life?

Either way, you’ll want to learn about reverse mortgages.

A reverse mortgage may be a great way to contribute to a retirement strategy. Financial planners are increasingly recognizing reverse mortgages as legitimate tools for retirement planning.

What is a reverse mortgage? (Note: It’s a complex subject and these are just some highlights.) 

A reverse mortgage is a way to get rid of mortgage payments and/or turn equity in your primary residence into tax-free cash. You can receive that tax-free cash as a lump sum or as a monthly distribution or in the form of a line of credit that can be tapped periodically as needs arise.

Reverse mortgage key facts include:

  • At least one borrower must be 62 or older.
  • It can only be used on your primary residence, which is a home that you occupy for 183 days or more per year.
  • Title to the property remains in your name.
  • You can sell the home at any time and pay off the loan just like any other type of mortgage.
  • You must pay off the reverse mortgage when the last borrower passes away or permanently leaves the home (for example, going to an assisted living facility).
  • You never owe more than the home is worth. Even if the loan balance exceeds the value of the home at time of sale, you and your heirs are not responsible for any shortage. The shortage is paid to the lender from an insurance program funded by fees charged to reverse mortgage borrowers – not by taxpayers.
  • You can get rid of current mortgage payments and are only required to pay expenses you would pay with a traditional mortgage or if you owned the house free and clear. This includes taxes, insurance, homeowner association fees and home maintenance.

All this magic happens because a reverse mortgage is a “negative amortization” loan. Simply, the balance you owe is increasing every month to cover the interest you owe and are not paying.

Your immediate reaction may be that this is a crazy idea. Many people think in terms of getting their house paid off by retirement. Why would they then be using up the equity they have accumulated?

Two things need to be said. First, equity in a home is an asset just like the money sitting in a 401k or IRA account. People realize that they are going to make withdrawals from such accounts to pay living expenses during retirement. The account balance may well go down over time and, hopefully, the money does not run out before you do!

There is a growing realization that home equity can and should be treated the same way. It is not the case that it should never be spent – it is simply a question of when is the best time to utilize it and how can it best be leveraged.

Secondly, home equity may be preserved and even grow with a reverse mortgage depending on how your home’s value grows over time.

A brief example will help. John and Jane Smith owe $100,000 on a house worth $500,000, giving them $400k in equity. Their current payment is $1500 per month for principal and interest. They refinance with a $100k reverse mortgage and get rid of the $1500 payment. They also start getting a payment of $1,000 per month, which they can get for the rest of their lives. They are better off by $2500 per month.

Ten years from now, they will owe $354k on the reverse mortgage. If their house has appreciated at 4.1% per year, it will be worth $754k. Subtract the $354k owed on the house and John and Jane still have $400k in equity. Over the ten years, they have effectively received $300,000 tax-free income and have preserved their original equity.

This is just one example and many other arrangements are possible. You can get cash in a lump sum instead of monthly. You can create a line of credit that actually grows in value over time.

Reverse mortgages are not right in every situation. Just know that we have access to reverse mortgage experts and can arrange a consultation to see if one might work for you. We are not lenders and derive no revenue from lending, but we want to be the source of information for you on how to take best advantage of the real estate you own.

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