When you live in Southern California, the equity in your home is often one of the most valuable assets in your portfolio. Not only are property values above the national average, but also home prices have tended to rise quickly (just talk to anyone who bought a home even five years ago!). Yet, few people see home equity as a “spendable” asset. But if you’re looking for a reliable source of cash today or 10 years hence, a Reverse Mortgage can be an ideal tool to turn your home equity into a tax-efficient source of income—even if you still owe money on your home.
Surprised? So was Lucy when we talked last month. I had already done the research and knew that she could qualify for a Reverse Mortgage. It seemed like the perfect way to access the cash she needed to take care of a half dozen home repairs she had been putting off since her husband died two years ago. As a retired widow, paying the $2,000 mortgage was cutting deeply into her resources, and she felt too cash constrained to set herself up for more bills to pay.
I suggested a Reverse Mortgage because I knew it could give Lucy the financial comfort she needed to maintain her home—whether she decided to stay put for the next 15 years or sell—and that it would also allow her some much-needed financial freedom. When I mentioned the idea, her eyes got wide. She couldn’t believe her ears. “Before Jack died, he told me a Reverse Mortgage was the last thing he would do,” she told me. “He said they were a scam.” She went on to say that using a Reverse Mortgage wasn’t something she even wanted to consider. “It’s too much of a gamble. I don’t want to risk losing my home.”
I can’t blame Lucy (or Jack, for that matter) for being wary. In the early days of Reverse Mortgages, they earned a bad reputation for being a shady product used by slick salesmen to take advantage of desperate, cash-strapped seniors. Despite late-night television ads that make them sound too good to be true, Reverse Mortgages really can be an important part of your overall retirement income strategy. In fact, while a Reverse Mortgage isn’t right for everyone, when used correctly and strategically, it may be just the solutionyou need to manage cash flow and protect your portfolio in retirement. Here are 5 reasons why it makes sense to consider a Reverse Mortgage today:
1. A Reverse Mortgage is similar to a Home Equity Line of Credit—but with no monthly payments.
A Reverse Mortgage is similar to a HELOC in that it provides a line of credit based on your home equity. Like a HELOC, that line of credit can be taken as a lump sum, in scheduled monthly payments, or reserved for future draws. However, while a HELOC requires you to pay back the loan with monthly payments over a set period, a Reverse Mortgage requires no monthly payments to the bank. Instead, the loan balance and interest accrues over time. Payment to the bank can be delayed until12 months after you leave your home.
2. You can use a Reverse Mortgage to pay off your current mortgage.
For many retirees in our “high rent” part of Southern California, paying even a reasonable mortgage on a fixed income can be a struggle. What’s great about a Reverse Mortgage is that because it’s based on the actual value of your home, you can use the money to pay off your current loan amount, potentially increasing your cash flow by thousands of dollars each month. You can also use a Reverse Mortgage to finance the purchase of a new home.
3. It’s relatively easy to qualify for a Reverse Mortgage.
Applying for a traditional mortgage or HELOC can be a challenge, especially if your income is limited. To qualify for a Reverse Mortgage, you must be at least 62, your home must be your principal residence, and you must have sufficient income to pay property taxes, homeowners insurance, and basic home maintenance. That’s it. Since you aren’t responsible for making monthly loan payments, even a less-than-perfect credit score or limited assets should not impact your eligibility.
4. A Reverse Mortgage can help protect your portfolio.
If the bulk of your retirement savings is held in an IRA, withdrawing assets before age 70½ will result in a sizeable tax burden. Using a Reverse Mortgage is a highly tax-efficient way to supplement your income and manage your cash flow. Because the money is a line of credit based on the value of your home, there are no taxes to pay. It can also give you the funds you need to delay Social Security until age 70, allowing you to take advantage of the Delayed RetirementCredit that increases your Social Security payment by 8% for each year you delay and nearly doubling your monthly Social Security income. (For more on this, see my blog Social Security & Women: Tackling the Challenges.) Plus, an available line of credit can prevent you from being forced to sell stocks from your portfolio should you need additional cash during a down market.
5. Reverse Mortgages are regulated to protect the borrower.
Lucy’s fear of losing her home is not uncommon. With a traditional mortgage, if the loan exceeds the value of your home, the bank can foreclose on your property and force you out of your home. Luckily, Reverse Mortgages are designed and regulated to protect seniors from this very scenario. A Reverse Mortgage is a “non-recourse loan,” which means that if the value of your home drops dramatically (think 2008!) you will never owe the bank more than the value of the loan. That alone can be a great source of financial security in your later years.
Of course, no line of credit is completely free of costs. Like traditional mortgages and HELOCs, Reverse Mortgages charge fees such as interest payments, origination fees, and closing costs. Reverse Mortgages also require a government-mandated, upfront mortgage insurance premium equal to 2% of the value of your home, plus 0.5% of the loan balance. But because these costs are rolled up into the loan amount, you pay no out-of-pocket expenses.
For most borrowers, that 2% is a small price to pay for the flexibility of turning their home equity into a spendable cash resource. And if you use the Reverse Mortgage to pay off your existing mortgage, you may even offset this cost completely. Do keep in mind that a Reverse Mortgage is best if you plan to stay in your home for the next five or more years. Otherwise, the upfront costs may outweigh the benefit.
One last thing to remember is that the best time to get a Reverse Mortgage is before you need it. A Reverse Mortgage should never be used as a last resort when all of your other assets have been depleted. Instead, consider applying for your line of credit while interest rates are still low so you can lock in a great rate. Having this flexible resource available if and when you need it can help turn your home equity into a powerful and strategic financial planning tool for decades to come.
A Reverse Mortgage is a complex planning tool that should be used as part of a carefully constructed wealth management plan. If you need help deciding if a Reverse Mortgage makes sense for you, let’s talk. As always, we’re here to help!
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