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Can I outlive my reverse mortgage?

Can I outlive my reverse mortgage?

One of a retiree’s chief concerns is that their savings won’t last, that they will “outlive” their retirement assets and run out of money.

This concern carries over to those who obtain a reverse mortgage to help them supplement their retirement income. Due to a lack of knowledge or misinformation, many seniors believe it’s possible to outlive a reverse mortgage and be kicked out of their homes before they’re ready.

The reality is that you can’t “outlive” the loan. What can happen is that you default on the loan because you fail to pay your property taxes and/or insurance. It’s also possible to borrow the limit on your reverse mortgage and not be able to borrow additional funds later. This depends on the home’s equity/value and your ability to keep your obligations.

What can cause the loan to become due

Regardless of how much you borrow from the reverse mortgage or how much equity you have available, you cannot be forced out of your house unless you fall behind on taxes, insurance, utilities or property maintenance.

If any of those situations occur, the loan defaults and the balance becomes due. The loan also becomes due if the borrower(s) pass away or permanently move out of the residence.

Until a default occurs or the loan becomes due because of death or relocation, the borrower(s) does not have to repay any part of the loan.

Borrowing too much, too soon

But even with that protection, borrowers can put themselves in a bind by borrowing too much too early.

When you are granted a reverse mortgage, the lender establishes a principal limit. This is the maximum amount you can borrow from a reverse mortgage, before upfront fees and closing costs are deducted. The available principal limit is calculated based on your age, the value of your home and the expected interest rate.

Taking a large lump sum at the beginning of your reverse mortgage loan depletes the principal available to you and means you won’t have those funds available later. It should be viewed in much the same way as taking a large withdrawal from your retirement account; it may be necessary, but it will have an impact later on.

Because of the risks of stripping out too much equity too soon, the federal government has placed a limit on how much a borrower can access in the first year of a federally insured Home Equity Conversion Mortgage (HECM). Borrowers who owe nothing on their current mortgage can obtain 60 percent of their principal limit in the first year. Those who have a mortgage balance can access enough to pay off their existing loan and in some instances an additional 10 percent.

Keep in mind that, depending on your age, you can typically access 50 percent to 65 of your home’s appraised value (equity) at the time you obtain the HECM reverse mortgage. If you then access 60 percent of that amount right away, you’re left with a small fraction for however long you have the reverse mortgage.

Again, even if you borrow the entire principal limit, your loan will not be due until you pass away, move, or fall behind on taxes and insurance. The amount you borrow will accrue interest for as long as you live in the home, but you won’t owe any of it until the loan closes. Therefore, you can’t “outlive” your reverse mortgage.

Tenure payment option

One way to ensure that you don’t deplete your equity too soon is to receive the proceeds through a tenure payment. This is a fixed monthly payment you receive for as long as you live in the home, whether that’s one year or 40 years.

A tenure payment option works similarly to a lifetime annuity, Social Security and pensions in that the provider establishes a monthly payment based on life expectancy. Once that payment amount is set, it can’t change or be taken away as long as the contract remains in force.

In the illustration of a reverse mortgage, the provider starts with an amount that is equal to 50 to 65 percent of the equity available in the home. Because a borrower can’t access the full amount of home equity, the lender is at less risk of lending more than what they can collect back when the loan becomes due.