Blog content updated on 11/8/2021
Jamie Hopkins, Co-Director of the American College’s New York Life Center for Retirement Income and an Associate Professor of Taxation at the American College, takes a deep dive into the strategic uses of a reverse mortgage in an article in Forbes magazine.
“Now, as many Americans near retirement, properly leveraging home equity will become a crucial part of a secure retirement plan,” he writes. “There are a variety of ways to tap into one’s home equity, such as downsizing, taking a traditional home equity loan, home sharing, entering into a sale leaseback arrangement, or entering into a reverse mortgage.”
The good news is that reverse mortgage rules have been put in place to protect borrowers that make today’s Home Equity Conversion Mortgages (HECMs) safer than ever.
What are these reverse mortgage rules?
As financial planner Robert Klein wrote in a column at The Street,3 “Like a child, reverse mortgages…went through a lot of growing pains during their first 25 years. Legislation was enacted and implemented between 2013 and 2017 to strengthen the FHA Mutual Mortgage Insurance Fund (MMIF) and protect the viability of the reverse mortgage program.”
The idea was to make sure people better understand the program, and use it as part of a planful retirement strategy—rather than as a cash windfall that’s spent too quickly, or a desperation move of last resort.
These changes have made the product “safer, stronger, and less risky for the borrower,” Klein says, and “provided greater scrutiny of income and credit.”
Today, there are limits on how much cash borrowers can access in the first year. And lenders must complete a financial assessment of all prospective borrowers to make sure they’ll be able to keep up with property tax, home insurance, and maintenance costs, to reduce any chance of loan default.
Protections have also been added for non-borrower spouses, to allow them to remain on the title and living in the home if the borrowing spouse should pass away first. Plus, the HECM maximum lending limit has continued to rise—up to $822,375 as of January 2021.
Why is home equity so important?
For many Americans, the equity in their homes represents a huge part of their financial assets—and with people living longer, they won’t be able to rely upon Social Security, pensions, and savings to supply the funds they’ll need in retirement. Without another source of funds, many face the prospect of outliving their assets.
Unfortunately, too many never even consider tapping into their most significant financial resource: the equity they’ve built in their homes by making monthly mortgage payments over the years.
According to the National Reverse Mortgage Lenders Association, total home equity for American homeowners age 62 and older was a record $9.02 trillion during the first quarter of 20211—and the average amount of home equity for senior homeowners age 65+ is $143,500.2 That’s a lot of money that seniors could be using to ease their financial worries and live a more comfortable retirement.
Why access it through a reverse mortgage?
A reverse mortgage offers a number of advantages when it’s used as part of a total retirement funding plan. It can provide a reliable source of funds to help older adults increase cash flow, reduce debts, and avoid draining savings, IRAs, and other invested assets. Plus, unlike other traditional loans—such as a Home Equity Line of Credit (HELOC)—it doesn’t require you to make monthly mortgage payments.2
How does a reverse mortgage work?
A reverse mortgage allows homeowners aged 62 and older to access a portion of their home equity and turn it into cash they can use as they wish, while retaining full ownership of their home.
How much you can get depends on a number of factors, including the home’s value, how much equity you have, the ages of the borrowers, and current interest rates. You can take the proceeds as a monthly payment, a lump sum, a line of credit, or in any combination.
As long as you live in the home as your main residence, you don’t have to make monthly mortgage payments—just continue to pay home insurance, property taxes and for home maintenance as you always do. The loan doesn’t come due until the last borrower leaves the home permanently, or passes away.
How does it work into your retirement plan?
A reverse mortgage is used to first pay off your existing mortgage, eliminating that payment and allowing you to use that money for other expenses. You can use the rest of the proceeds to pay down debts, cover medical costs, or help family members. Here are some other ways to use it in a retirement funding plan:
- You can use the line of credit for peace of mind. Unlike a HELOC, a reverse mortgage line of credit grows over time, creating a financial “safety net” that’s there for future needs or unexpected expenses. You can also tap into it during market downturns, when your invested assets generate negative returns.
- You can use it to maximize your Social Security benefits. The proceeds from a reverse mortgage may allow you to delay taking your benefits early, so you get the maximum possible payments later in retirement—rather than receiving a smaller benefit sooner.
Ask your financial advisor if one of these strategies could work for you.
To read the full Forbes article, click here.
To learn more about a Longbridge reverse mortgage, call 855-523-4326 or fill out the form on this page to get a free info kit. There’s no cost and no obligation.
- Joint Center For Housing Studies, 2018.
- Real estate taxes, homeowners insurance, and property maintenance required.