Many concerns about reverse mortgages are driven by misconceptions and half-truths about how the program works. In recent years, concerns about borrowers’ risks have been addressed by new guidelines from the Federal Housing Administration, which insures these loans. Still, service providers, reverse mortgage experts and financial planners can do more to help Seniors determine whether reverse mortgages are right for them and ensure their place in a secure financial plan for retirement.
For those who don’t know, a reverse mortgage is a way to take advantage of your equity without needing to make regular payments. This differs from a home equity loan or a second mortgage as both require the borrower to make monthly payments.
Reverse mortgages are generally offered through the Federal Housing Administration’s (FHA) Home Equity Conversion Mortgage (HECM) program. There are various types of reverse mortgages, but generally speaking homeowners ages 62 and older can use reverse mortgages to access equity as a line of credit, a pre-determined monthly payment, or a lump sum cash out. The loan must be repaid after the home is sold or when the last borrower or eligible spouse dies or has permanently moved out of the home.
While some planners and other professionals are skeptical about reverse mortgages most retirement planners are starting to see them as a valuable tool, one which will reduce the burden of worrying about having enough money for retirement.
Financial Concerns Facing Seniors
The US population is aging, and the high costs of housing, food, and health care are one of the major challenges in retirement. Most Seniors do not see their home as one of their retirement assets, even though it is generally one of their largest assets. Older homeowners can use their home wealth by tapping into a traditional home equity loan or line of credit as an alternative to a reverse mortgage, but this often does not make sense as it would add a new payment. Reverse mortgage loans allow borrowers to draw on their home equity without adding a new expense to their budget and they can stay in the home for their lifetime and that of their spouse.
More than seventy-five percent older adults are homeowners. Even among adults over age 85, the homeownership rate exceeds the national average. More than 10 million of these older homeowners have low incomes. Nearly 2 million older homeowners are living on 30 percent or less of their area’s median income. Americans are living longer and the number of low-income older homeowners is expected to reach 18.2 million households by 2035.
Equity from home ownership accounts for about half of the overall asset portfolio of older adults. For low-income and minority homeowners, home equity makes up an even larger share of household assets.
Among households ages 55 to 64, more than 55 percent have less than $25,000 in retirement accounts, and roughly 41 percent have no retirement savings. Many of these households rely on a pension plan or Social Security and are otherwise “House rich and cash poor”. Most are concerned that they cannot live on their current retirement budget. These worries are compounded by high rates of housing cost burdens among older adults and high out-of-pocket health care costs.
Here are some ways you can use a reverse mortgage as an important element of a secure financial plan.
Augment Available Cash Flow When Needed
Managing cash needs can be challenging for Seniors. If their accounts are focus on stock, then the challenge becomes maximizing returns while minimizing capital gains and risk! In addition, unexpected cash needs can force retirees to draw on stocks and other investment accounts at the most inopportune times.
Having a HECM reverse mortgage loan with a line of credit can help retirees to better manage these issues. The size of the line and available funds to draw depends on several factors. A qualified reverse mortgage broker can help you to maximize the funds available based upon your specific circumstances. Then you can sit with your financial advisor to figure out the best plan to manage these funds.
This sort of review will also help you to map out contingencies and be prepared when those cash demands and unexpected expenses hit. Another big advantage to using the line of credit feature of a HECM is that it is revolving – meaning you can make draws and pay down balances just as with a traditional line of credit – and the balance of funds available will also grow as the value of your home appreciates.
Delay Drawing Social Security
A reverse mortgage loan can also be used to provide the cash flow needed in early retirement and delay receiving benefits until the age of 70 or later. While this may not be important to some, delaying payments until age of 70 or later can increase your benefit by more than 30%?
This is become more popular with Seniors today as it also increases survivor benefits as well. With seniors living much longer into retirement, this can extend benefits significantly. This may be especially important if there are not other assets to draw upon later in retirement.
Rainy Day Fund
Seniors are living longer and more active lives. It’s more important than ever to have a solid financial plan to ensure you will have enough money to live into your 80’s. Getting a HECM reverse mortgage can give you access to the additional cash flow needed to help with unforeseen financial challenges. Talk to your advisor, the cash from a HECM Reverse Mortgage can be used to purchase additional life insurance as well as long-term care insurance and other important financial decisions..
These are just some of the many ways a HECM reverse mortgage should be considered as an important element in your financial planning and security of your financial well-being in retirement. Each individuals circumstances are unique so it is important to work with a qualified reverse mortgage broker or specialist and talk to your financial advisor to review your retirement plan is today and see how a HECM reverse mortgage loan fits into your secure financial plan for retirement.