Ever wonder what to do with equity that has built up in your home? Home values are at historical levels leaving homeowners wondering, how can I use one of my largest assets to meet my retirement income goals? Let’s explore how a reverse mortgage may enhance your retirement plan.
WHY A REVERSE MORTGAGE
A reverse mortgage may be a great way to access the equity in your home to enhance your retirement lifestyle, pay for unexpected medical expenses, make home improvements, and more. Having the ability to access home equity in retirement while aging in place can provide huge peace of mind to homeowners.
Before jumping into the reverse mortgage process, please consider the following.
HOW IT WORKS
Reverse mortgages let you access a percentage of the equity in your home as a kind of advance payment on your home equity. Generally, the money does not have to be paid back as long as you are living in your home. When you die, sell your home, or move out, you, your spouse, or your estate would repay the loan.
Most reverse mortgages utilized in the United States are HECM or Home Equity Conversion Mortgages which are insured and regulated via the federal government. These are the type of loans we will refer to inherently in this article.
Proceeds are generally tax free and can be paid via various annuity terms, lump sum, line of credit or used to pay off existing mortgages.
QUALIFICIATIONS & COSTS
You must meet the following requirements to qualify for a reverse mortgage:
- Age 62 or older
- Principal Residence
- Not be delinquent on other Federal debt
- Have financial resources to cover tax, insurance and ongoing maintenance
- Own home outright or have significant equity in home
- Home Equity Conversion Mortgage (HECM) lending limit of $822,375 for 2021
As with any loan, there are costs associated with obtaining a reverse mortgage which can vary greatly from each lender including: closing costs, origination fees, third party charges, servicing fees, mortgage insurance premiums, and interest rate costs.
Interest is charged on the amount loaned and your loan amount increases over time and is not tax deductible. Most reverse mortgages have variable rates that may be tied to a financial index and have flexibility on how you receive the payout.
Financial planning pro tip: we recommend shopping various lenders and asking for the total annual loan coast and any loan repayment conditions before making a decision.
OTHER CONSIDERATIONS FOR A REVERSE MORTGAGE
What if you want to leave the property to heirs?
- A non-recourse clause can be included which means that you, or your estate, can’t owe more than the value of your home when the loan becomes due, and the home is sold. Alternatively, if you or your heirs want to keep the home and pay off the loan rather than sell it, generally with an HECM you would not have to pay more than the appraised value of the home.
What if I have a non-borrowing spouse?
- In 2015, regulations were updated to allow non-borrowing spouses the ability to stay in the home after the borrower’s passing. While the surviving spouse would not be eligible to continue to draw from the credit line, they no longer need to worry about loan repayment until they leave the home on their terms.
Deciding whether a reverse mortgage is right for your retirement plan requires consideration of many factors. You will want to be sure you meet all of the requirements listed above to qualify for this type of loan. You will also want to be sure to shop various lenders before making any decisions.
Contact us for more information and strategies around reverse mortgages and retirement planning.