A Reverse Mortgage as a Retirement Planning Tool
Americans are not saving enough for their retirement, the most recent Federal Reserve Survey of Consumer Finances found.
Americans from age 55 to 64 had a median retirement savings of $134,000 in their accounts when the survey was conducted in 2019. While this is a decent chunk of money, it’s not enough for retirees to maintain their current lifestyle and live comfortably in retirement.
(The Survey of Consumer Finances is only conducted every three years, so this is the most recent survey. The next survey will come out in 2023.)
This survey was conducted before the COVID-19 pandemic of 2020, which took a toll on retirement savings, another survey revealed.
The Anytime Estimate Retirement Finances Survey, released in May 2022, found that 62% of Americans tapped into their retirement savings to offset costs during the pandemic.
Add all of this to record inflation, and those heading into retirement may need to look to other sources of income to add to their retirement portfolio.
How a Reverse Mortgage May Help
One option to consider is a reverse mortgage. Reverse mortgages used to be seen as something to turn to as a last resort, but this is no longer the case.
A reverse mortgage may be worth considering earlier on in retirement.
“A younger retiree can stay in the house while turning equity into an income stream,” Craig Lemoine, the executive director of the Academy for Home Equity in Financial Planning, told The New York Times.
A reverse mortgage can act as a cash reserve, pay for large projects, or even be a source of monthly income — all without having to take on additional monthly mortgage payments.
What is a Reverse Mortgage and How Does it Work?
The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is also backed by the Federal Housing Administration (FHA).
A HECM reverse mortgage is only available to homeowners who are 62 years of age or older who have significant equity built up in their homes.
When homeowners take out a reverse mortgage, they are borrowing against the equity in their home or, as the name implies, they are converting their home equity into cash.
Qualifying homeowners have the option of receiving their funds as a lump sum, a line of credit, monthly payments, or a combination of the three.
Borrowers must take out the maximum amount that they qualify for, but if there is a portion that is taken as a line of credit, the unused amount earns interest while it sits in the account.
How much you can receive is based on several factors such as your age, the market value of the home, and the interest rate. However, the FHA puts a limit on how much homeowners may receive from a HECM reverse mortgage. The new lending limit for 2023 is $1,089,300.
When a reverse mortgage is obtained, it pays off the original mortgage, if there is one, which means that it also eliminates the monthly mortgage payments that go with it. However, homeowners are still required to pay for homeowner’s insurance, pay property taxes, and maintain the home.
The home still belongs to the homeowners, not the bank.
A reverse mortgage loan is paid back when the homeowners sell the house, when the last borrower or eligible nonborrowing spouse passes away, or if the home is vacated for more than 12 months, which may happen if the homeowner goes to live in a long-term healthcare facility.
Who Should Get a Reverse Mortgage?
A reverse mortgage may be a good option for qualifying homeowners who want to retire in place. It is generally not recommended for homeowners who don’t expect to stay in the home for at least five years.
Because of the variety of ways that the funds may be received, a reverse mortgage can be used to address a variety of problems and situations including the following:
- Major Home Improvements. If homeowners have major home renovations they want to make to bring the home up to date or make it more accessible for them in their retirement, then receiving the money as a lump sum would be the way to go.
- Supplement Monthly Income. For homeowners that are finding that their retirement savings aren’t enough to cover their monthly expenses, they may opt to receive the money in the form of monthly payments.
- Save for a Rainy Day. If you are concerned that your emergency fund isn’t enough to cover unexpected expenses, a line of credit would be a good option.
Those are just a few scenarios where a reverse mortgage might help. There are no rules about how the money may be spent.
Are Reverse Mortgages Safe?
Since HECM reverse mortgages are backed by the FHA, that also means that it comes with several protections.
Reverse Mortgage Counseling
Before you can officially apply for a reverse mortgage, homeowners are required to complete a counseling session with a third-party counselor approved by the U.S. Department of Housing and Urban Development (HUD). This ensures that you are fully educated on the reverse mortgage process and understand all of the financial implications.
The Right to Cancel
Homeowners that are going through the application process to obtain a reverse mortgage loan have the right to cancel up to three business days after signing the closing loan documents.
A Non-Recourse Loan
A HECM loan is a “non-recourse” loan, which means borrowers will never owe more than the home’s value when it is time to pay back the loan. This protects homeowners and their heirs from having to tap into other assets to pay back the loan.
Eligible Non-Borrowing Spouse
In September 2021, the federal government passed a law offering better protections for eligible non-borrowing spouses that allows them to remain in the home in the event that the borrowing spouse passes away or vacates the home for more than 12 months.
The Bottom Line
Taking out a reverse mortgage is an important financial decision you will want to research carefully. But now you can see that there are many ways a reverse mortgage can help offset costs in retirement if you decide it’s the right choice for you.
Mutual of Omaha Mortgage, NMLS ID 1025894. 3131 Camino Del Rio N Suite 1100, San Diego, CA 92108.
Charges such as an origination fee, mortgage insurance premiums, closing costs and/or servicing fees may be assessed and will be added to the loan balance. As long as you comply with the terms of the loan, you retain title until you sell or transfer the property, and, therefore, you are responsible for paying property taxes, insurance and maintenance. Failing to pay these amounts may cause the loan to become immediately due and/or subject the property to a tax lien, other encumbrance or foreclosure. The loan balance grows over time, and interest is added to that balance. Interest on a reverse mortgage is not deductible from your income tax until you repay all or part of the interest on the loan. Although the loan is non-recourse, at the maturity of the loan, the lender will have a claim against your property and you or your heirs may need to sell the property in order to repay the loan, or use other assets to repay the loan in order to retain the property.
These materials are not from HUD or FHA and the document was not approved by HUD, FHA or any Government Agency.
Subject to Credit Approval. www.nmlsconsumeraccess.org