Incorporating a Reverse Mortgage Into Your Financial Planning

Reverse mortgages can be a helpful tool in your retirement toolbox when it comes to financial planning.  It used to be viewed that reverse mortgages were things you saw on late night infomercials or only sold by cold-call salesmen to unsuspecting retirees, but that seems to have changed over the years.  

Reverse mortgages have the opportunity to provide an influx of cash to those that qualify, and can be part of a balanced and financially sound plan in retirement.  I’ve been reading about this for months, and I’ve learned a few tips about where a reverse mortgage is most helpful or the best choice.  

Hi there, my name is Bob, and I’m enjoying retirement in my mid-50s.  I started researching a reverse mortgage because I meet the qualifications (more on that later), and I decided to start this blog to help others learn what I learn.  I hope you enjoy it.  

So what is a reverse mortgage and when is it a good financial choice?

The most common type of reverse mortgage is called a Home Equity Conversion Mortgage (or HECM).  As the name implies, it uses the equity in your home as the basis for a loan.  Unlike a traditional “forward” mortgage, the bank makes payments to you in the form of a lump sum, fixed payments, a line of credit, or a combination of those options.  You’ll need to be at least 55 years young to qualify and own your home outright or have paid down a considerable amount of your mortgage.  The loan becomes due and payable when you pass away, move permanently (if you have more than 1 house for example), or decide to sell the house.  Additionally, the bank cannot go after your heirs if the loan value exceeds the value of the house after you pass away.  

Now that you know the basics, I’ve learned a few things about what scenarios work best for a reverse mortgage.

1. You don’t plan to move.  Since the loan becomes due and payable when you sell your house or move to a different permanent residence, a reverse mortgage works best if you plan to stay put.  If you have any short term plans to move, you may want to consider selling your house instead of a reverse mortgage.
2. You can afford the upfront costs.  Just like a traditional “forward” mortgage, there are closing costs, origination fees, servicing fees, and mortgage insurance.  Remember, a reverse mortgage is a loan at the end of the day. 
3. You can maintain the home.  Part of the deal with a reverse mortgage is preventing the home from falling into disrepair.  This is because the house could be sold by the bank if the borrower(s) pass away.  Ultimately, the lender just wants to make sure they don’t have a fixer-upper on their hands when the loan becomes due and payable.  
4. You and your spouse are both over the age of 55.  Technically, the rules for an HECM allow for a spouse to be younger than 55 as long as the older spouse is at least 55, but there are a few caveats that are good to know here.  First, the loan amount will be based on the age of the youngest borrower - so having a younger spouse will limit the amount of the loan in this case.  Next, if the older spouse passes away, the younger spouse will not be able to borrow any additional money against the reverse mortgage.  The younger spouse would not be forced the leave the home in this case.  I’m sure you can see how it gets a little trickier with one spouse younger than 55, so again, the best bet is both spouses over 55.

There are certainly other options besides a reverse mortgage that should be considered.  These include:

1. Selling your house.  Maybe you are in a situation where you live in the same house you’ve had since your children lived with you.  This might be too much house.  Sometimes just selling your home might help you achieve the financial benefits you are looking for.
2. Refinancing.  If you have other sources of income in retirement, this may be a viable option.  Sometimes seniors may not qualify for loans or forward mortgages because they can’t demonstrate any income.  However, if you do have some income to qualify, this might be a good option.
3. Open a line of credit.  This offers some nice flexibility because you can look into interest only options, borrow when you need to, pay the money back, and even repeat the process.  Just make sure the dollars and cents work for you if you choose this option based on the interest rates available.

I know that a reverse mortgage can be a lot of information to take in.  That’s part of the reason I created this blog.  If you’d like to read more about reverse mortgages, please take a look at these posts to get started.  

Additionally, you can call the experts at Equity Access Group for help with your specific questions and your specific case.