Many clients I have spoken to talk about their home as a retirement investment. This idea always strikes me as funny since they can’t access the equity in their home without taking out a loan or selling it. If they sell the home and move into something smaller where they don’t have a mortgage (assuming they have enough equity in the home they are selling) then at least they wouldn’t have as much debt to service and they could possibly have a little cash left over that would help them with their monthly obligations for a time. If they refinance their home to access their equity with a traditional mortgage, they would still have a mortgage payment they have to service. So how can your home be a part of your retirement plan?
How Does a Reverse Mortgage Work?
Let me start by saying that the early you start preparing (investing) for retirement, the better. You will have more options as to how to fund your retirement and how you can live in retirement. Click here to go to my page on how much money do you need for retirement. Let’s get back to the topic at hand: how do you effectively use your home as a retirement tool. For those people who have limited income and can’t afford the payment on a traditional mortgage, a reverse mortgage may be the solution. Qualifying for a reverse mortgage is all about your age and the amount of equity in your home (or the amount you have to put down if you want to finance the purchase of a home with a reverse mortgage). In order to qualify for a reverse mortgage, you need to be at least 62 years old but the older you are the better and the more equity you have the better. A reverse mortgage can be used to pay off the existing mortgage on your primary residence or it can be the mortgage you use to finance the purchase of a new home and the down payment requirement will depend on how old you are and the purchase price of the home. With a reverse mortgage, you won’t have a mortgage payment – you will still have to pay property taxes and homeowner’s insurance. Additionally, depend on the situation, it may be possible for a borrower to either get a lump sum of money for a major purchase, like a car, or to augment their income with regular monthly payment to the borrower that come from the equity in the house, or a combination of these. Interest accrues monthly and will do so until the home is sold either because the owner decides to move or passes away and the heirs are required to either sell it or refinance it into a regular mortgage – or pay it off if they have the money to do that.
Key Points of a Reverse Mortgage:
Even after the equity is used up, the borrower / homeowner can live in their home until they die. For example, if a borrower uses up their equity by the time they are 85 but lives to be 105, interest will continue to accrue and may use up all of the equity, depending on how fast the home appreciates, but the borrower has the right to live their until they die with the only obligation being to pay the property taxes and insurance. A reverse mortgage is a non-recourse loan so there is no recourse to the borrowers or their heirs – this means that either one can walk away from the home and if the sale of the home doesn’t cover the debt owed, the lender / loan servicer can’t come after the borrower (or their heirs) for the deficiency. As long as equity is available, as per the loan agreement when the mortgage is originated, cash advances are available. Additionally, all fees on the loan can be paid by the proceeds of the loan such that no money needs to be paid out of pocket as long as there is enough equity.
Additional features:
- No equity sharing with the lending bank
- Lender is insured against loss
- Borrower insured against lender default
- Borrower can’t owe more than the value of their home
- HUD pays the difference to the lender
- The borrower’s estate / heirs are protected against deficiency judgments
Borrower Eligibility:
- All owners must be 62 or older
- They must own the property outright or have enough equity to pay off liens against the property (their current mortgage(s)).
- Borrowers must occupy the property as their primary residence
- They can’t be delinquent on any federal debt
- Borrowers must participate in a consumer information session given by a HUD-approved HECM counselor
- They must pass a Financial Assessment Test
- Certain property requirements must be met.
The Downside (and upside):
Reverse mortgages are best for borrowers who haven’t built enough assets through investing to cover their monthly obligations and be able to afford some fun / entertainment. The longer a person can wait to use a reverse mortgage the better. Rely on your social security income and 401k / Roth IRA money for as long as possible – preferably without completely depleting these sources – before getting a reverse mortgage. The reason for this is as you age, you will 1) have access to more of the equity in your home and 2) since you will have fewer years of the mortgage by starting at a later age, you will have less accrued interest on the loan which means a possible windfall (to some extent) for your heirs – if that’s something you care about, BUT 3) having access to more of your equity means you have more options with the reverse mortgage like taking out a lump sum and / or drawing a monthly income from the equity to augment your other sources of retirement income. The downside to getting a reverse mortgage is that depending on certain things (like how long you live and whether appreciation outpaces interest accrual), your may not have anything to leave to your heirs. Conversely, a reverse mortgage may be just what some people need to provide a good quality of life in their retirement years.
Feel free to contact me at (702) 812-1214 or (801) 893-1737 or by email at jed.wunderli@noblehomeloans.com if you have any questions regarding reverse mortgages.