For many, home ownership is considered part of the American Dream. Your home can also represent your largest financial asset. What happens when you spend down your retirement savings and your remaining assets are tied up in home equity? Income becomes an issue and you may be forced to sell your house; but what if you want to remain in your home?
A reverse mortgage may be the answer. The main objective of a reverse mortgage is to convert your home equity from an illiquid asset to a liquid asset, creating a stream of income. Unlike a conventional mortgage, you receive monthly payments as opposed to making them. The lender takes a lien against the home and pays you a monthly payment that reduces your equity. The loan amount is based on a home appraisal. Closing costs will apply, and can be deducted from the loan or paid directly. The loan does not have be repaid until you die or sell the home.
Requirements:
- You (and any other owner) must be at least 62 years old
- The home must be your principal residence
- The home must meet minimum property standards
- You must have greater than 50% equity in the home
- Mandatory counseling session with a HUD approved agency
Payment options:
- Single lump sum
- Regular monthly payment for either a fixed period or for life
- Line of credit to be tapped when you deem necessary
- Any combination of the above
Benefits:
- No monthly mortgage payments, the lender pays you
- You still own the home
- Insured by the Federal Government
- You can leave your home to your heirs, but they must repay loan balance
- Does not affect your Social Security benefits as loan payments are not taxable
- You cannot outlive the monthly payments, which are insured by the FHA
The concept of reverse mortgages dates back to Roman times but the first formal exchange occurred in 1961 in Portland, Maine in which Nellie Young, a poor widow, made an arrangement with the local bank. The bank took a lien against her home and paid her a monthly amount, enabling her to live there until her death, at which time the bank took ownership of the home. The concept slowly grew in the 70’s but a lack of regulation created a Wild West atmosphere. In 1988, Congress enacted stricter regulations to end the unscrupulous practices and in 2013, the formalized Home Equity Conversion Mortgage (HECM) program was established to streamline rules and regulations and eliminate other confusing options.
Until recently a reverse mortgage was thought of as a last resort retirement planning strategy however, academic research has indicated that this can be a useful strategy leading to a more successful outcome. That being said, reverse mortgages are complex products and can be difficult to understand. It is imperative that the use of a reverse mortgage be a well thought out strategy and discussed with a Certified Financial Planner™, who is equipped to analyze your options regarding retirement income. Please reach out to us if you think a reverse mortgage would be a good fit for you or someone you know.