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Reverse Mortgages and Retirement Income Planning?


You have probably heard the term Reverse Mortgage, but just what is it and what does one do for you?

Here are some great resources to help you learn about them in the comfort of your home so you can decide how one may work for you (more on that later).

Note: Home owners need to be age 62 or older (both if a couple). If you’re not 62 or older yet, you can use the time to learn more about how these may enhance your retirement income plan.

 

What is a Reverse Mortgage (Home Equity Conversion Mortgage – HECM)?

What are the general requirements and how do they work in general?

How might a Reverse Mortgage serve as a retirement planning tool?

What are some frequently asked questions about them?

HUD has a great portal page that has links to everything about Reverse Mortgages on their website.

  • So instead of paying for your mortgage if you have one, once you have a reverse mortgage that mortgage payment expense in your budget is immediately eliminated … yes, your mortgage principal and interest (loan) payment goes away. You still need to be able to pay for your property taxes and insurances.
  • If you don’t have a mortgage, you still get the extra income to help pay for other living expenses you have.
  • You have a resource in the form of your home.
    • Reserve Asset: One option is to retain it as a reserve asset for spending later (although you could do this too by getting a HECM line of credit to make it easier to access later). Many people keep their home as a reserve asset for bequeathing it to their heirs (although most heirs today probably won’t live in the home like the old days on farms; they’d sell it).
    • Pay for repairs or remodeling.
    • Eliminate other debt – and thus reduces your monthly expenses of that debt (hint: don’t begin to increase your debt again – old habits die hard. Instead learn to live within your newfound income).

Here is a great short pamphlet by the Center for Retirement Research of Boston College called Using Your House for Income in Retirement (once on their webpage … click on the “PDF of booklet” link).

  • The booklet compares staying put to downsizing (and there’s a calculator link) as one option to free up money in your budget.
  • The booklet also evaluates what a reverse mortgage may do as an alternative to moving.

There’s another alternative using a reverse mortgage where you do move – either downsizing or simply changing location, or whatever reason. It’s called HECM for Purchase.

  • Basically you could sell your current home and use those proceeds as part of your down payment for a new home. How much down depends on how large of a reverse mortgage you may get – you pay the difference. The idea is that you won’t have a mortgage payment anymore (just taxes and insurances).

Here’s a website to learn more about reverse mortgages and how to possibly customize one that’s right for your situation.

Reverse Mortgages are designed specifically to prevent you from having to sell your home (as long as you meet the requirements such as keeping taxes and insurances paid up to date, etc.).

Here is an interesting research paper in the Journal of Financial Planning called Reversing the Conventional Wisdom: Using Home Equity to Supplement Retirement Income. This paper examines three strategies for using home equity, in the form of a reverse mortgage credit line, to increase the safe maximum initial rate of retirement income withdrawals. In other words, how a reverse mortgage helps improve the use of your other non-home related money you use for retirement income. Basically the concept is to free up latent money that is not available or liquid from your home through the use of a home mortgage. The concept here is to transfer the risk of some portion of your retirement income away from some markets into the real estate market where your home is located (and beyond that, supported by a non-recourse reverse mortgage – be sure the one you get is). All the reasons why circle back to all of the above discussion previously.

 

Notes:

In certain cases, there is an interest deduction with respect to decedent for heirs who follow some specific rules, which may allow for a lump sum distribution from their inherited 401k or IRA which is offset by this deduction. See a qualified real estate tax attorney for these requirements. I’m pending a live link to a taxation journal paper on this topic, and will post it here once that becomes available.

Although the various HECM programs are the same with all lenders, all lenders fees are not. If a Loan officer is both a forward (traditional) mortgage and reverse mortgage originator they can’t be compensated differently.  Forward (traditional) mortgage originators are paid a basis on the loan amount, so they also have to be compensated the same on the Reverse loan.  Other loan officers are paid based on the value of the home, no matter what the person draws from the reverse mortgage or what program they choose.  It’s important to work with someone you can trust to provide you with all options, costs, etc., to help assess whether or not any program is a fit for your planning needs.

Nationwide Mortgage Licensing System (NMSL) has  a free service for consumers to confirm that the financial-services company or professional with whom they wish to conduct business is authorized to conduct business in their state

I’ve posted articles before on the traps of reverse mortgages if one is not careful and use these properly.

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