Social Security and dividends from investment accounts are two of the most important sources of income for seniors nearing retirement. But suppose it isn’t sufficient. Some Americans in their golden years may wish to think about one of their most valuable possessions: their home.
Now there’s a solution: reverse mortgages. Instead of taking out a bank loan, homeowners can borrow against their home. More retirees may be able to afford day-to-day living costs, large medical bills, or house improvements if they take out reverse mortgages, since older homeowners are holding record amounts of home equity. However, not everyone’s retirement plan will accommodate them, as they are still somewhat niche.
Don Graves, who founded the Housing Wealth Institute and is an adjunct professor of retirement income at The American College of Financial Services, says, “It’s not a one-size-fits-all or one-size-fits-most.” A reverse mortgage, however, can allow the appropriate homeowner to remain in their house throughout retirement and still afford the lifestyle they desire.
When may a reverse mortgage be a good way to boost retirement income? When this happens, it could be a good fit for you.
It’s a good age for you.
Generally, you need to be 62 or older to qualify for a reverse mortgage, and your borrowing power increases with age. The maximum amount you are eligible to receive, or the “principal limit,” is heavily influenced by your age. Being older grants you access to additional funds because this limit accounts for the loan’s expected duration.
The age of the youngest borrower determines a reverse mortgage’s principal limit, so bear that in mind if you intend to include a spouse or co-borrower on the application.
There could be choices for individuals who have not yet turned 62. Under the auspices of the Federal Housing Administration, the Home Equity Conversion Mortgage (HECM) has a minimum age requirement. Although HECMs are the most common, some institutions may offer reverse mortgages with younger age requirements, typically 55.
You need a retirement income supplement and have significant equity in your property.
A reverse mortgage could be a viable option for homeowners who own their house entirely but are struggling to make ends meet on Social Security alone, according to financial expert and founder of Gugle Wealth Advisory, John Gugle.
“You’re taking out a loan against the equity in your house to help you pay the bills, buy food, and maybe even take a little vacation,” Gugle adds.
With enough equity in your house, a reverse mortgage can be a good choice even if you’re still making payments on your mortgage. How much equity you need in your home is something that different lenders will look at differently. A 50% down payment is often required to qualify for a mortgage, but lenders will likely offer you better terms if you can demonstrate a higher level of equity. You can put that equity to use for anything you want with a reverse mortgage, from groceries and petrol to medical bills.
If you have retirement funds but prefer to delay their use, these products are worth considering. If you hold financial assets, such as stocks, and you would prefer not to sell them at a loss, this could occur.
To “avoid withdrawing from retirement savings during a market downturn,” Gugle suggests a reverse mortgage as a potential strategy. “Instead of having to sell off your investments at the last minute, you could use the equity in your home to pay your bills.”
As a homeowner, you have long-term housing goals.
Closing charges, origination fees, and the initial mortgage insurance payment are all expenses that borrowers must pay before a reverse mortgage may be funded. Recouping the funds from a reverse mortgage could be challenging if you plan to relocate soon after taking one out.
If a customer informed Graves that they intended to relocate within three years, he would advise them against getting a reverse mortgage, according to Graves. However, a reverse mortgage may be an option worth exploring if you are one of the 88% of Americans who would prefer to age in place.
The idea is to have a longer-term contract, Graves says. “Maybe, in your eternal dwelling.”
You would like to terminate your mortgage payment as soon as possible.
Monthly mortgage payments could cause a sizable dent in your savings: According to a recent analysis from real estate business Redfin, the typical costs are approximately $2,800, which is slightly less than the record-breaking amount. Your budget can get a huge relief if you forego those payments.
A reverse mortgage may be an option for those who have built substantial home equity but still owe their mortgage. That’s because, according to the special terms of a reverse mortgage, you won’t have to pay a dime toward the principal until you either sell your house or pass away, provided that you stay on top of your property taxes, insurance, and repairs. In this way, you can free up more money each month by paying off a current mortgage with a loan rather than taking out a new loan. An ideal candidate for a reverse mortgage, according to Gugle, is someone whose monthly income will be significantly reduced due to a change in circumstances, such as a layoff or retirement.
Additionally, he mentions that it provides some flexibility.
We’ve gone over every possible benefit and drawback.
Like any other financial product, a reverse mortgage has potential benefits and drawbacks that must be carefully weighed before committing to one. Those initial outlays were already mentioned. Beyond a doubt: You have the same risk of foreclosure as with a regular mortgage. If you stop making payments on items like property taxes or homeowners’ insurance, or if you can’t keep up with payments on them, this could happen.
Be mindful that non-borrowing spouses have some safeguards, but if you have other people living in your home, they might have to leave when you die if they weren’t part of the original loan agreement.
Also, your bequest to future generations might be smaller than you had hoped. In the event of a reverse mortgage, repayment of the loan will be contingent on the heirs’ ability to sell the home or raise the necessary funds. Consider other options if you’re very set on leaving your house without any strings attached.
Last but not least, a reverse mortgage’s earnings won’t cut into your Social Security payments. Still, they could affect other income- or asset-based government programs, such as Medicaid or Supplemental Security Income. The income from a reverse mortgage is not included because it is a loan, but any funds that have not yet been spent can be used to meet the asset limit requirements for these government programs.
