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reverse mortgage vs Single Premium Immediate Annuity SPIA

Comparing reverse mortgage to selling a home and investing in an SPIA

For some retirees who have little to no retirement savings and no pension income, their home may be the only asset they can use to supplement their Social Security income and fund their retirement.

The question for many will be whether they should sell the home and live on the proceeds, or take out a reverse mortgage and continue living in their house.

Answering that question will depend on many factors:

How attached are you to the property?

How much income do you need in retirement?

What is the current real estate market like and can you get a decent price selling your home?

Then it comes down to running the numbers to see which option will better meet your retirement needs.

A hypothetical comparison
Here is one hypothetical comparison of a 66-year-old male retiree who has no mortgage balance on a home with a $300,000 market value.

One option is to take out a reverse mortgage on his home. A reverse mortgage is a type of home equity loan that allows homeowners to convert their home equity into cash.

According to the National Reverse Mortgage Lenders Association, a trade group, this individual could take out a reverse mortgage on his property and receive $1,000 in monthly income for as long as he owned the home. Once he no longer owns the home, he would sell it to repay the loan plus interest and fees.

An alternative to a reverse mortgage is selling the home and investing the proceeds in a single premium immediate annuity (SPIA), which would pay a lifetime income stream. You make a single premium payment in exchange for an immediate stream of income that is fixed for the duration of the contract.

Assuming the home sold for $300,000 and the agent’s commissions and other closing costs totaled $30,000, the retiree would have $270,000 to deposit into an SPIA.

One calculator shows the retiree could collect $1,500 a month for life using this option. Regardless of how long he lived, these payments would continue. But no matter when he died, even if it’s just a few years after the contract started, there would no further payments to beneficiaries.

The retiree could opt for a lifetime SPIA with a 20-year certain provision. This means he would receive lifetime income, but if he died within the first 20 years after payments have begun, his beneficiaries would continue to receive this income for the remainder of the 20 years. If he chose this option, his monthly payments would equal $1,341 for life.

Another hypothetical scenario
Another scenario is the same 66-year-old retiree with a 65-year-old spouse. If they took out a reverse mortgage that lasted until they both passed away, the couple would receive $813 in monthly income for as long as they lived in the home.

The SPIA option, assuming the $270,000 home sale proceeds, would provide joint life payments of $1,243 a month. If they wanted the 20-year certain provision, their payments would only fall to $1,216 a month.

There is much to consider
No matter which option is chosen, the retiree(s) will incur home-related expenses. With a reverse mortgage, the homeowner has a mortgage-free property, but will continue to owe property taxes, insurance, and maintenance costs. If he sells the home outright, he will need to pay rent on an apartment or assisted living facility.

Another aspect to keep in mind is that, although you receive less income from the reverse mortgage, you do retain more flexibility. Instead of opting for monthly payments, you could turn your home into a line of credit that you can tap whenever you need it. The less you tap that line of credit, the less you’ll owe the lender when it comes time to repay the loan.

Also, because you can’t borrow more than the home’s value, you should still have equity left in the event you want to sell the home before you pass away. Once you repay the reverse mortgage, the remaining proceeds are yours to keep.

With an SPIA, once payments begin, you have essentially forfeited those funds to the insurance company. Other than the monthly payments you receive, the money is no longer accessible for, say, a medical emergency or other expense.

It’s important for retirees in this situation to weigh all of their options carefully and speak with trusted advisors who can explain the pros and cons of each option. If you choose to obtain a Home Equity Conversion Mortgages (HECMs), you will be required to speak with a financial counselor to discuss all the provisions of the Agreement and alternatives.