Financial Planning: How a Reverse Mortgage Can Help
Sixty-six year old Lisa M. is the epitome of a happy and prosperous senior homeowner. With a successful acting career and paid-off home in sunny Los Angeles, California, she enjoys an active and fun lifestyle. And, though it may surprise you, much of her ability to continue this lifestyle is possible because of Lisa's reverse mortgage loan.
"I did it for the freedom," she shares. "I was not struggling before, but I was tired of having to budget. So I invested some of the money and now I can get up and do the things I want to do. I go to Zumba every day, and keep up my beauty regime."
Since its inception in the early 1960s, reverse mortgages have sometimes been misrepresented as a loan meant only for retirees with financial hardship. However, in actuality, they are versatile financial planning tools for borrowers such as Lisa to use in a strategic way. Simply defined, reverse mortgages are loans designed for senior homeowners ages 62 and older to help convert a portion of their home equity into cash that they can use for whatever they desire. This means that if you are searching for methods of strengthening your future retirement resources, this loan option may be a solution for you.
Uses in Financial Planning
There are a few tactical methods in which a reverse mortgage can be used to enhance your retirement years. With your loan funds, you may want to strategize your financial planning in any of the following ways:
Delay Payouts from your Social Security and Pension
One popular way to use reverse mortgage funds is to hold off early withdrawal of social security benefits or pensions in order to maximize your future payouts. For example, according to the official Social Security website, seniors may choose to retire as early as the age of 62, but doing so may result in a reduction of benefits of as much as 30%.
However, postponing your retirement can result in an increase of up to 8% for each year that payouts are delayed. Using funds from a reverse mortgage instead of drawing upon social security until reaching the maximum age of 70 can help you maximize your lifetime benefits.
Protect your Portfolio in a Down Market
In a similar fashion, reverse mortgage funds can also help you avoid withdrawing from a portfolio that has recently lost value. In the event of a down market, pulling funds from your reverse mortgage, or supplementing your portfolio with these proceeds can provide a better chance that it will recover from the loss and protect the longevity of your accounts.
Eliminate your Monthly Mortgage Payments
With a reverse mortgage, one requirement is that the loan must be the only lien on your home and that any existing mortgage must be paid off with the funds. Though this requirement may decrease some of the funds you expected from the loan, the benefit is that reverse mortgages do not require monthly payments. This is a great opportunity to eliminate your monthly mortgage payments and free cash that used to be tied to that expense.
Increasing monthly cash flow is a powerful feature with this loan. However, it is important to note that borrowers are still required to continue paying the taxes and insurance on the property, as well as keeping the home properly maintained. Because no monthly payments are required, this is essential for your loan to be considered in good standing.
Establish a low-cost, growing line of credit. One of the many reverse mortgage disbursement options you can choose is the line of credit, which allows you to access funds as needed and repay the balance when convenient. An additional benefit is that the interest is only charged on the portion used, and the unused portion has the potential to grow. This means that you may utilize a reverse mortgage line of credit strictly for emergencies or unexpected expenses, and as a more flexible alternative to high interest credit cards.
Other Questions
In addition to questions about how a reverse mortgage can help in financial planning, potential borrowers may also wonder about following:
Will a Reverse Mortgage be a Financial Windfall?
When first receiving a reverse mortgage, it may seem as though you are receiving a windfall of money, especially if you choose a lump sum disbursement option. The feeling of having access to a large amount of money may be exciting; however, it is important to remember that your funds are still loan proceeds that must be paid back at loan maturity. Thus, be sure to use your funds responsibly. Loan maturity typically happens when a borrower moves away, passes away, or defaults under the loan terms. When this happens, the loan is commonly repaid by selling the home. Funds from the sale of the home are used to repay the loan, and any remaining funds are given to your estate.
Why Should a Reverse Mortgage Counselor be Involved?
Before applying, the Federal Housing Administration (FHA) requires that all borrowers meet with a reverse mortgage counselor approved by the US Department of Housing and Urban Development (HUD). This safeguard ensures that you are informed of all benefits and risks of the loan, and are aware of all other options as well. It is for your benefit that a reverse mortgage counselor is involved to clarify whether a reverse mortgage will truly help you achieve your goals.
What Type of Reverse Mortgage will Best fit me?
There are a few types of reverse mortgages. The best fitting reverse mortgage will depend upon your specific situation:
- The Standard Home Equity Conversion Mortgage (HECM) - As the most popular type of reverse mortgage, this government-insured loan provides you with a number of consumer protections. For example, if your loan balance surpasses the value of your home when it is sold, the government insurance will cover the difference.
- The HECM for Purchase - If you are interested in downsizing or moving to a new location, then this loan option is available for you. Meant for borrowers who would rather get a new home than remain in their current one, this loan type combines two transactions into one: you can buy a new home that better fits your needs and get a reverse mortgage on it simultaneously.
- The Reverse Mortgage Refinance - If you already have a reverse mortgage but have found that it would be beneficial to refinance, it is possible to do so. Borrowers may refinance their reverse mortgage and take advantage of a lower interest rate, or access more cash if their equity has increased.
- Single Purpose Reverse Mortgage - Offered by some non-profit organizations and some local and state government agencies, this type of reverse mortgage is not federally insured and designed to be used for one specifically approved purpose, such as paying for a particular home repair. Only a small amount of equity is used, thus making the loan less expensive than a HECM reverse mortgage.
- Proprietary or Jumbo Reverse Mortgage - One limitation of a HECM reverse mortgage is that there is a maximum lending limit of $625,500. If your home value is higher than that, this reverse mortgage type allows you to convert more cash from your equity on a high-valued home. Though you may be able to access more loan proceeds with this option, these reverse mortgages are not government insured, so they do not come with many of the consumer safeguards that HECM reverse mortgages do.
As a financial planning tool, there are quite a few ways you can use a reverse mortgage loan to benefit your life. For a consumer considering your options, fully researching the versatility of this loan may give you indispensable information to improve your financial future. Speak with a reverse mortgage professional to understand the loan details and find out how it can help you in your specific situation. If you do, you may just discover one of the most helpful financial planning tools in your retirement.
Sources:
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