Blog content updated on 12/6/21
What’s the key to a secure retirement? It may be the one that opens your front door.
Times certainly have changed for retirees. For many, the traditional “three-legged stool” of retirement funding—Social Security, pensions, and savings—is no longer enough to pay for the kind of retirement lifestyle they’d like to live.
Often overlooked is that for many older adults, home equity is the most valuable asset they have. In fact, the average amount of home equity for senior homeowners age 65+ is $143,500.1 That’s why today, more financial experts and advisors are recommending that retirees consider accessing their home equity as another source of funds—and one way to do that is through a reverse mortgage.
Alicia Munnell, Director of the Center for Retirement Research at Boston College, says that “Using a reverse mortgage to tap home equity is one of the most powerful options available to retirees today.”
What is a reverse mortgage? It’s a loan specifically designed for homeowners age 62 or older that allows you to tap into your home equity to increase your cash flow in retirement—without having to make any monthly mortgage payments.
That’s right—with a reverse mortgage, there are no mandatory monthly mortgage payments. The loan doesn’t come due until the last borrower leaves the home or if you fail to continue to pay property taxes and homeowners insurance, and to keep the home in good report according to FHA guidelines. If you want to make payments along the way to reduce the loan amount, you can.
That’s why it’s called a “reverse” mortgage. With a traditional mortgage, the homeowner pays down the debt over time—but with a reverse mortgage, the loan balance grows over time because the homeowner isn’t making monthly mortgage payments.
This useful financial tool offers some distinct advantages to older adults looking to improve their finances in retirement. Here are the top five:
1. It can pay off your current mortgage, allow you to eliminate monthly mortgage payments, and boost your cash flow.
When you take out a reverse mortgage loan, the proceeds are first used to pay off any existing mortgage. And since a reverse mortgage doesn’t require monthly payments, you can eliminate that expense and have more cash available each month.
How much cash you can get? That depends on your age, the interest rate on the loan, the value of your home and how much equity you’ve built up. With today’s historically-low interest rates and historically-high home values, there may never be a better time to look into a reverse mortgage to maximize your proceeds.
Why not just get a home equity loan or HELOC, or refinance your forward mortgage? In a recent Money magazine column2, Aly J. Yale explains: “Home equity loans, HELOCs and refinances all require a monthly payment, something retirees —or anyone on a limited income, for that matter—might be hesitant to take on. If a payment sounds unappealing in your case, you can also look at options like a reverse mortgage or equity-sharing agreement.”
2. The proceeds are income tax-free3 to receive as you wish—and use as you wish.
With a reverse mortgage, you’re simply getting an advance on the home equity you’ve already accrued, so the proceeds aren’t considered income and won’t be taxed. And generally, a reverse mortgage won’t affect your Social Security retirement or Medicare benefits. However, it could impact your ability to qualify for need-based benefits such as Supplemental Security Income or Medicaid, so make sure to consult a financial advisor.
In addition, accessing your home equity—as compared to selling your home and getting a smaller one with a lower payment—allows you to avoid potential capital gains taxes. Married couples would have to pay taxes on any sale profits over $500,000. For single homeowners, the non-taxable limit is just $250,000.
Finally, a reverse mortgage gives you options on how to receive your money. You can take the proceeds as a lump sum, monthly payments, a line of credit, or in any combination of those. Use it to pay bills, reduce personal debts, help with healthcare expenses, make home repairs, aid family members, or for any other purpose. It’s up to you.
3. You can use it to buy a new home, without monthly mortgage payments.
A Home Equity Conversion Mortgage (HECM) for Purchase is a type of reverse mortgage specifically designed to allow you to buy a home that’s closer to family, more physically accessible, or better suited to your needs. For example, it’s a great option if you want to “right-size” to a smaller or larger home.
Here’s how it works: using some of the proceeds from the sale of your current home or cash on hand, you make a down payment on the new home (typically 40-50% of the sale price*.) The rest of the sale cost is covered by your HECM proceeds, and you can use any remaining funds as you choose. It helps simplify the process for seniors by taking care of the home purchase and the reverse mortgage in a single closing.
Besides helping you get the home you really want, a HECM for Purchase has other benefits:
- It can increase your purchasing power by helping you afford more home with more amenities, and increase your monthly cash flow.
- It can help you eliminate monthly mortgage payments. As long as you live in the home as your permanent residence and continue to pay property taxes, insurance, and maintenance costs, monthly payments on the house aren’t required.
- And as long as you meet those terms, you can continue to live in the home and retain full ownership.
4. It can help preserve other sources of income. More financial advisors are realizing that by using the proceeds of a reverse mortgage, clients may be able to put off tapping into their 401(k), personal savings accounts, or investments—and delay taking Social Security payments, so they get the maximum benefit. Jeffrey Levine of thinkadvisor.com writes that of all the reverse mortgage options, the line of credit could be the most useful in today’s retirement planning environment:4
“Such loans can be used to great effect in a variety of ways. For instance, in the event of a significant market correction that leads to a substantial decrease in portfolio assets, using a reverse mortgage line of credit can help clients meet their income needs, while avoiding tapping their portfolio at an inopportune time in the market cycle.”
In addition to helping you avoid depleting other financial assets, it can also help with significant expenses, such as healthcare costs, that you wouldn’t have enough to cover otherwise.
“Today’s low-rate environment only amplifies the benefits of this planning option,” Levine concludes.
5. The value increases over time. Taking your reverse mortgage proceeds as a line of credit has a number of advantages over a traditional Home Equity Line of Credit (HELOC). Unlike a traditional HELOC, your reverse mortgage credit line can never be reduced: in fact, its value is guaranteed to increase over time—regardless of the loan balance or the home value.
Plus, as part of the HECM program, every reverse mortgage borrower meets with an independent, third-party counselor to make sure that they understand the features of the loan and their responsibilities—so they can make an informed decision about whether it’s right for them.
Getting started is simple.
To find out if you qualify for a reverse mortgage program, and decide if it’s right for you, contact a trusted lender to explore your options. The experts at Longbridge Financial can answer your questions and help you make the choice that’s best for you.
To learn more, fill out the form to get a free information kit from Longbridge Financial.
1. Joint Center For Housing Studies, 2018.
2. “Baby Boomers Are Uniquely Poised To Cash In Big, On Their Homes,” Aly J. Yale, Money, 8/27/21.
3. Consult a financial advisor and appropriate government agencies for any effect on taxes or government benefits.
4. “Protecting clients’ portfolio assets with a reverse mortgage,” Jeffrey Levine, ThinkAdvisor, 1/4/17.
* Percentage dependent on customer’s specific situation and subject to change.