Retirement Planning: Reverse Mortgages vs. Annuities

For many seniors looking to supplement their retirement income, reverse mortgages and annuities are common options.  Both provide an income stream over time that can be extremely valuable to retirees.  Which one is better?  That’s a complicated question, and the answer really depends on each person’s situation.  

This blog post is going to review some key differences between reverse mortgages and annuities with the hope that it can help those reading it to make the best decision for their specific situation.  

What are they?

A reverse mortgage is a loan that leverages the equity in a borrower’s home to create payments to the borrower through these options: lump sum, fixed payments over time, line of credit, or a combination of these.  These become due and payable most commonly when the borrower (and/or their spouse) die.  Typically the loan is repaid via the sale of the house.

An annuity is a financial product where the annuitant makes payments to a financial institution (usually an insurance company) and receives fixed payments over time.  

What are the requirements?

The most common type of reverse mortgage is called a Home Equity Conversion Mortgage (HECM).  This is regulated by the Department of Housing and Urban Development (HUD).  In order to qualify for this type of loan, the borrower must meet these criteria:

• Be at least 55 years of age
• Live in their home as their primary residence
• Be up to date on homeowners insurance and property taxes
• Maintain the home so it does not fall into disrepair

Annuities don’t have any set requirements like a reverse mortgage, but they are regulated as insurance providers by each state.  

How do the payouts work?

With a reverse mortgage, the lender makes payments to the borrower.  These can be a lump sum, fixed payments over time, line of credit, or a combination of these.  These payment options can be helpful because of their flexibility.  A lump sum can help with some outstanding expenses like home renovations or medical bills.  Fixed payments over time can provide a steady source of income that seniors can rely on.  With a line of credit, the money is there if needed.  Additionally, those who change from a traditional ‘forward’ mortgage to a reverse mortgage will benefit from the swing of making payments to the bank to receiving payments from the bank.

Annuities vary widely, but the basic premise is that the annuitant (the person who will receive the payments) funds the annuity via a lump sum or fixed payments over time.  In exchange, the insurance company makes payments over time to the annuitant based on the contract for that annuity.  These can be helpful for those who may be concerned that they may outlive their retirement savings.  

What are the costs?

Reverse mortgages are loans.  Just like a traditional forward mortgage, there are closing costs associated with a reverse mortgage.  One thing to consider is that the closing costs can be part of the loan itself, so the borrower doesn’t necessarily need to make a payment to cover these costs.

Annuities also have costs, and most notably are fees for early withdrawal.  There is an initial funding period where the annuitant pays the insurance company either via a lump sum or by making payments over time.  The payments from the insurance company to the annuitant is set via a contract and usually begin after the funding period.  If the money is needed sooner than the agreed upon start date for the payments, there are fees associated with this.  Some insurance companies also have additional fees as part of the annuity.  

It’s very important to shop around and ask about all fees for either option.

What’s the bottom line?

Reverse mortgages and annuities can each provide steady income during retirement.

If you are 55 years old (or older), own your home outright or have a significant amount of equity in it, and don’t plan on moving, a reverse mortgage may be right for you.  If you’re interested in learning more about a reverse mortgage, please give the folks at Equity Access Group a call.  Their team specializes in reverse mortgages, and they can help you learn more.