Menu

Reverse Mortgage Guide 2016.

The complete reverse mortgage guide updated for 2016. Everything you ever wanted to know about a reverse mortgage in one page.

Financial reasons for getting a reverse mortgage

The main advantage of a reverse mortgage is the ability to turn your home equity into cash without the concern for qualifying for a loan or budgeting for monthly loan payments.

Most reverse mortgages provide multiple ways to receive the funds. You can choose a one-time disbursement or monthly payments. You may even have the option of turning your home into a line of credit that you tap whenever you need it instead of liquidating the entire value of the home at once. And there’s the added benefit of living in the home while receiving payments.

With the exception of the little-used single-purpose reverse mortgage, proceeds from this type of loan can be used for any reason. The flexibility of reverse mortgages makes them a potential option for any of the following purposes.

You want to pay off debts

If you have car payments, credit card bills, or other debts, then you have monthly payments that are taking up part of your retirement income budget. While a reverse mortgage doesn’t eliminate your debt, it can help you defer it for several years.

Depending on how much you owe and how much you’re allowed to obtain from a reverse mortgage, you could obtain a reverse mortgage line of credit and use it to pay off your existing debts. Anything left on the line of credit would be available for future needs. And instead of making monthly payments for the foreseeable future, you don’t have to repay your reverse mortgage until you pass away or move out, using the sale of your home to satisfy the debt.

You want to pay for medical or long-term care costs

Whether you have existing medical bills, or you want to have money set aside to cover future needs, a reverse mortgage might be an option. You can take a portion of your reverse mortgage principal limit upfront to pay off an existing medical debt. You can also set up a line of credit that you can tap to cover deductibles and other costs of care when they arise. Or you can use a monthly tenure payment to help pay for insurance premiums.

You want to preserve your other retirement assets

If you have savings and retirement plans that you want to preserve without making withdraws, a reverse mortgage can offer a substitute source of income. This can be advantageous in a few ways.

First, if your portfolio hasn’t performed adequately enough to provide for your full retirement, you can give it a few more years to grow while using your reverse mortgage funds as a substitute.

You can also utilize the strategy to avoid compounding the effects of down markets by withdrawing funds from a retirement plan that is underperforming.

Imagine if you withdraw 5 percent of your retirement account balance at the beginning of the year for living expenses. In a perfect world, the account value would grow 5 percent the rest of the year based on investment performance, essentially replacing what you withdrew.

But we don’t live in a perfect world. Consider what would happen if you withdrew 5 percent at the beginning of the year, then a down market caused another 10 percent drop in the account value. Now, after just one year, you have 14.5 percent less money than what you started with.

But it gets worse. To withdraw the same dollar amount in year 2 that you did in year 1, you would have take out about 5.8 percent of the account value at the beginning of the year. If you do that, the account will have to grow nearly 20 percent for the year to get back to where it started on the first day of your retirement.

Having a reverse mortgage credit line can help you minimize the impact of market losses on your 401(k) or IRA.

You want to start a business

The traditional notion of retirement doesn’t appeal to all seniors. Many would prefer to keep working, but may have aged out of their chosen careers, and they don’t find the option of working in fast food or retail all that appealing.

An option for those who want to keep working in retirement is to start a business. For some it might be turning a hobby like quilting or bicycle repair into a money-making business, or taking the knowledge and experience, they gained through 35+ years in the workforce and forming their own company.

If there’s a need for a start-up capital and initial operating expenses, then a reverse mortgage could be a source of those funds rather than trying to obtain a business loan, which would likely require a business plan, a downpayment, and other costs.

 

You want to travel

Now that you have more time and fewer obligations, you may want to spend some of your retirement years visiting new places and experiencing other parts of the country or even the world.

But sometimes even the desire to travel can’t overcome the concern of using retirement assets on large, nonessential expenses. That’s where a reverse mortgage line of credit can help. Having a line of credit established against your home equity can provide plenty of resources to use for occasional travel expenses. The advantage of using a line of credit is that you only have to repay what you actually use, plus fees and interest.

You need a source of supplemental income

If Social Security and your retirement accounts aren’t meeting all of your retirement income needs, then a reverse mortgage can provide another source of funds.

Among the payment options available, you can select a tenure payment, which provides fixed monthly income for as long as you own the home. The amount you receive will be based on your your age, the value of your home and the expected interest rate. You can also choose a term payment, which provides a fixed monthly payment for a specified period.

One of the advantages of a reverse mortgage is that, since it’s considered a loan to be repaid, the money generated from it is not taxable income.

You want to buy life insurance or an annuity

One of the goals of any retirement plan is to maximize all of a senior’s retirement resources.

A strategy that has been employed in the past is to obtain a reverse mortgage, take a portion of those proceeds in a single lump sum payment, and allocate that payment to a single premium immediate annuity.

Likewise, retirement and estate plans are often managed to maximize the legacy left behind to a person’s heirs. You can take a lump sum from the principal provided by the reverse mortgage to make a one-time premium payment for either a whole life or universal life insurance policy.

You want to help a family member

If money isn’t a concern for you but perhaps for somebody in your family, then a reverse mortgage line of credit can provide funds for your to be of assistance. You may want to help a family member out of difficult period or help pay for the tuition of a grandchild.

Real estate purposes for getting a reverse mortgage

The main advantage of a reverse mortgage is the ability to turn your home equity into cash without the concern for qualifying for a loan or budgeting for monthly loan payments.

Most reverse mortgages provide multiple ways to receive the funds. You can choose a one-time disbursement or monthly payments. You may even have the option of turning your home into a line of credit that you tap whenever you need it instead of liquidating the entire value of the home at once. And there’s the added benefit of living in the home while receiving payments.

With the exception of the little-used single-purpose reverse mortgage, proceeds from this type of loan can be used for any reason. The flexibility of reverse mortgages makes them a potential option for seniors who want to pay off, purchase or upgrade a home.

You want to eliminate your monthly house payment

If you’re retired or closing in on retirement, any amount of money you can eliminate from your monthly budget helps stretch your retirement assets further. If you have a few years or less on your conventional mortgage, you can use the proceeds from a reverse mortgage to pay off your conventional mortgage and remove the principal and interest payment from your monthly budget.

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

You want to buy a new home

While most reverse mortgages are obtained to enable homeowners to remain in their houses, there is also a program that allows seniors to use a reverse mortgage to buy a new principal residence.

Known as an HECM for Purchase, this program allows seniors to buy a new house and obtain a reverse mortgage on it within the same transaction. Because it’s a single transaction, there is only one set of closing costs the borrower must pay. The intent of the program is to help seniors move when the need arises and still have the option of benefiting from the reverse mortgage.

This option can come in handy if you want to downsize from your large home to something more manageable, of if you want to move closer to family members.

You want to buy a second home or vacation property

Many retirees living in northern climates want to spend the winter season in the warmer south. Or seniors who enjoy fishing and the outdoors may want a cabin for vacations and weekends. One way to fund the purchase of a second home or vacation property is to obtain reverse mortgage on your primary residence and use those proceeds as a downpayment or to pay the full cost of a second property.

You want to fix up or add to your current home

After owning a home for a decade or more, it’s possible that some needed repairs have fallen by the wayside. Perhaps the roof, siding, or the HVAC needs replacing. Maybe the bathroom and kitchen haven’t been updated since you purchased the home 25 years ago. Or you may want to enjoy retirement by building your own woodworking shop. Whatever you want to do to improve your home, a reverse mortgage can help you pay the full cost of improvements. In addition to potentially increasing the value of your home, you also have the option of waiting until you pass away or move out before you have to pay for those upgrades.

 

Questions to ask yourself before getting a reverse mortgage

Obtaining a reverse mortgage requires people to take a big step and borrow against the equity they’ve built in their homes over the years, and in many cases agree to sell the home once they die instead of passing it on to heirs. It’s a transaction that should not be entered into lightly.

As you think through the decision, here are several questions to think through and to talk through with your family and financial advisors.

What do I need the money for?

People who enter into a reverse mortgage arrangement should have a plan for using the money. This is especially true if you take a lump-sum payment, as a large sum of money can disappear quickly if not spent wisely.

Knowing what you want to use the money for — home repairs, paying off other debts, supplemental income, etc. — will also help you determine which payment option is best.

How much income do I need?

If you’re seeking a reverse mortgage to supplement your retirement income, you should begin by determining exactly how much more you need than what your current income sources are providing. As you go through the process, examine ways you can make cuts in your living budget. Once you’ve determined how much more money you need, make sure that a reverse mortgage based on your age, property value and interest rate will pay enough to fill that gap.

Have I considered other options to generate cash or monthly income?

Reverse mortgages are a useful financial tool for seniors, but they aren’t for everybody. If you need cash or stable income, there several alternatives to a reverse mortgage you may want to consider, including refinancing your conventional mortgage, taking out a home equity loan or home equity line of credit, selling your home to your children and renting it back, buying an annuity, or getting a part-time job.

Should I consider selling my home outright because of my current financial situation?

When you obtain a reverse mortgage, you maintain ownership of the property. That means you are responsible for taxes, insurance, utilities and maintenance. Failing to stay current on these expenses could lead to a loan default, and the lender could close the loan and demand repayment. If your financial situation hinders your ability to pay these costs, then a reverse mortgage may not be the best option.

How long do I plan to live in my house?

Closing costs and fees on a reverse mortgage can total as much as $10,000. In addition, lenders charge a service fee and if your reverse mortgage is federally insured, you will have to pay a premium for mortgage insurance. All of this is in addition to the principal and interest of the loan.

Because of these extra costs, experts suggest that if there’s a chance you will want to or have to move from the house within five to seven years, you may want to reconsider a reverse mortgage. Keep in mind that if you permanently move out of the home for any reason, the loan becomes due immediately.

How is my health?

This question is related to the previous question. If your health is such that you may need to move to assisted living or a long-term care facility in a few years, then you may want to forgo a reverse mortgage.

Am I ok with the house being sold after I die or move out?

If the loan was granted to a single borrower, it becomes due once that homeowner passes away or permanently moves out. Unless there are assets elsewhere in your estate that can cover the amount owed, the house will have to be sold. The proceeds from the sale will repay the loan, plus interest and fees. Anything left over will go to your estate.

Once the lender learns of a borrower’s death, it will send a notification to relatives or the executor of his or her estate that the loan is due. Therefore, it’s important that your children and/or whoever will be handling your affairs after your passing are aware of the reverse mortgage so it doesn’t surprise them.

If one spouse has died and a surviving spouse is listed as a borrower on the reverse mortgage, he or she can continue to live in the home, and the terms of the loan do not change.