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Eliminate Retirement Debt Reverse Mortgages

HECM Reverse Mortgage

Oct 07

Can a reverse mortgage help you reduce your debt in retirement?

One of the best ways to maximize your retirement resources is to spend as little of your retirement income on debt payments. Debt payments not only add significant cost to your monthly budget, but they also require interest payments, for which you the borrower receive nothing in return.

Unfortunately, many seniors, especially those in the middle class, have entered or will be entering retirement with a significant amount of debt.

According to the Pew Survey of American Family Finances, nearly 30 percent of middle-income Baby Boomers dedicate more than 40 percent of their monthly income to paying down debt. This is a substantial porting of a retiree’s monthly income hence the rise of popularity of reverse mortgages.

And while 44 percent of this generation own their homes outright, nearly one-quarter have more than 20 years remaining on their mortgages.

An up-to-date survey by the Society of Actuaries found that the principal form of debt for pre-retirees is mortgage debt, at 52 percent, followed by credit card debt at 48 percent, and car loans at 40 percent. The survey found that home repairs, dental expenses, and health care and prescriptions caused the most standard “financial shocks” among retirees.

Seniors should attempt to pay off as much debt as possible, including any mortgage, before retirement. In fact, financial experts recommend that a retiree’s debt should account for no more than 10 percent of income.

So how can one quickly retire debt — or at least the monthly payments that come with debt?

One option is a reverse mortgage.

What exactly is a reverse mortgage
A reverse mortgage is a sort of home equity loan that allows particular homeowners to convert their home equity into cash. It differs from a conventional home equity loan in that the owner is not required make monthly payments. Rather, a reverse mortgage loan is paid, with interest, when the property is sold, refinanced, or when the homeowner moves out of the house. This added flexibility was designed for seniors to increase their savings, reduce the stress, and be able to afford to retire in their existing homes as they age.

Determined by how much you can borrow from a reverse mortgage — that is based on your home’s equity, your age, and present interest rates — you could retire some or all your debt and eliminate those monthly payments using the proceeds from the reverse mortgage.

You’re not getting rid of debt, but you’re deferring the repayment of it to a later date. Also, reverse mortgages are typically repaid by selling your house once you no longer need it for your dwelling.

Using a reverse mortgage to settle your current one
Some homeowners, in fact, apply for a reverse mortgage for the sole purpose of removing the principal and interest payment on their homes from their monthly fundings. This is extremly popular for seniors with a substantial monthly mortgage payment to reduce debt in retirement and increase their savings.

In essence, what you are doing under this strategy is improving the amount of money you owe on your dwelling, but deferring the repayment of that debt until you pass away or move out of the property. Your entire mortgage debt increases, but you have more income available to spend on items besides home.

For example, in one scenario a 65-year old homeowner’s home is currently valued at $400,000, and he or she owes $75,000 on the mortgage. If the borrower just used the reverse mortgage incomes to finish paying off the original mortgage, after ten years the reverse mortgage balance, including fees and interests, would balloon to $135,000.

So if you’d to sell the house in ten years either because of death or move, the net income remaining after the reverse mortgage was refunded could be $265,000, and that’s assuming the home didn’t appreciate in value during those ten years.

In the same scenario, the borrowers would owe close to $210,000 if they remained in the house for 20 years after getting the reverse mortgage.

So again, the pick is:

Having less to pay in monthly expenses during this period by paying off the traditional mortgage, but owing a reverse mortgage lender a hefty amount once you pass away or move out of the house; or

Keeping the monthly payments on the first mortgage for as long as it takes to pay the balance in full but being able to pass along the property’s total worth to your heirs without having to pay a reverse mortgage lender.

In the end, you want to have options for your finances and retirement. There is no harm in knowing your options and figuring out which one will give you the most comfortable retirement. The reverse mortgage program requires you to be 62 or older, have equity, and good credit/income. IF you qualify and are interested in comparing your options feel free to give us a call and or get a free quote analysis.