Do you enjoy packing up and moving? Is sorting through decades’ worth of belongings your idea of a good time? Maybe you just love lifting heavy boxes? If you’re like most Americans, the idea of moving is anything but enjoyable. And you’re certainly not alone if you’re planning to avoid a big move and retire in your current home!
According to Bank of America’s 2022 Homebuyer Insights Report, a whopping 70% of Gen X and Baby Boomers plan to age in place, remaining in the home they know and love for their retirement years.1 Another 2022 study, conducted by the National Poll on Aging, reported 88% of adults aged 50 to 80 believe it is important to age in place.2
So, why are so many people planning to stay put?
Maybe they’ve raised their kids in their current home and it offers a lifetime of fond memories. Or it’s in the perfect location, allowing them to stay close to family and friends. Or perhaps their home simply offers the independence and autonomy they desire and hope to maintain.
Whatever the individual reason, Aging in Place is an increasingly important part of retirement planning for older generations nationwide. When planning to age in place, it’s important to be mindful of the likely need for updates both big and small.
For many homeowners, their house will require repairs, modifications, and upgrades over the years. For example, the flooring they once loved may present a serious fall hazard or doorways may need to be widened to accommodate a wheelchair. Smaller projects, like investing in helpful technology or installing grab bars and handrails, can also have a major, positive impact on their quality of life.
When faced with the prospect of making major home improvements, some may feel they have no option but to sell their home due to their financial or physical limitations (or perhaps both). The good news? There are solutions available to help older homeowners retain their property and continue to age in place safely and comfortably. One of the options available is the underutilized, and often misunderstood, reverse mortgage loan.
How is a reverse mortgage different from a traditional mortgage?
While a reverse mortgage shares many commonalities with a traditional mortgage, there are several key differences. For starters, a reverse works by allowing an eligible homeowner to tap into their home’s equity, making this a winning financial tool for those on a limited income looking to stay in their homes for their retirement years.
Here are a few more ways a reverse differs from a traditional mortgage loan:
- No monthly payments. Reverse mortgage loans eliminate any existing mortgage (a requirement of the loan) and do not require monthly payments thereafter. Like any mortgage, the homeowner must continue to pay for property taxes, insurance, and maintenance.
- Age specific. Reverse mortgages were designed specifically for older homeowners. Borrowers must be at least 62 years of age to qualify.
- Non-recourse. The homeowner, non-borrowing spouse, and any heirs will never owe more than their home is worth, making this a non-recourse loan.
- Access to equity. Loan proceeds can be accessed a number of tax-free ways, including monthly disbursements, a one-time lump sum, a standby line of credit, or any combination of these.
- Credit growth. A reverse mortgage line of credit can never be reduced and will increase over time, regardless of the loan balance or home value.
- Important protections. Reverse mortgages are regulated by the federal government and include several borrower protections. For example, a financial assessment, reverse mortgage counseling, and eligible non-borrowing spouse safeguards.
As you can see there are quite a few differences between the two loans! So how do you know which option, if any, is the right move for you? Our team can work with you to go over all the options available to you and answer any questions you or your loved ones may have, all with the ultimate goal of helping you achieve your financial objectives in retirement. Now, let’s take a deeper look at this retirement solution.
What are the qualifications for obtaining a reverse mortgage?
To qualify for a reverse mortgage, you must be at least 62 years old and own, live in, and have sufficient equity in your home. If you have an existing mortgage, your reverse mortgage will first pay it off and distribute the remainder of your proceeds to you in a plan of your choice. Distribution plans include a one-time lump sum payment, monthly payout, growing line of credit, or any combination of these, depending on your goals.
How can reverse mortgage proceeds be used?
Outside of the advantages outlined above, another great feature of reverse mortgage loans is that the proceeds can be used any way you like. Let’s look at a few scenarios that illustrate a few different ways to utilize loan proceeds:
- Make “Aging in Place” modifications. Unfortunately, most modern homes are not designed to accommodate the needs of aging homeowners. To continue living safely and comfortably in your home, it’s important to make any necessary changes. Reverse mortgage proceeds can be of critical importance when making these modifications.
- Solution: An initial lump sum, to fund immediate improvements, combined with a standby line of credit, for any future home modification needs.
- Fund home improvement projects. Beyond modifications and repairs, extra money in your bank account could give you opportunity to complete major renovations you otherwise wouldn’t have been able to afford. From revamping your kitchen to creating an outdoor living space, there’s a wealth of potential waiting to be uncovered in your current home.
- Solution: Opting for a lump sum payout to fund home renovations.
- Cover health expenses that may arise. Being able to prepare for the unexpected when it comes to healthcare can offer greater peace of mind. The goal of Aging in Place often includes the desire to receive care inside their home, rather than in an outside facility. Loan proceeds can help pay for your care needs, including in-home care services or compensation for your loved ones who care for you.
- Solution: A standby, growing line of credit for unpredictable healthcare needs
- Maximize Social Security benefits. If you’re one of many Americans who hope to defer Social Security benefits as long as possible, having cash in the interim to cover expenses can give you the flexibility you need to delay taking social security to maximize your benefits in the long run. Funds from a reverse mortgage can make all the difference. Deferring for even one extra year can make a major difference for your future.
- Solution: Monthly payouts makes deferring these benefits an achievable goal.
These examples illustrate a few of the ways access to home equity can offer a wide range of benefits to older adults. Maybe this all sounds great, but you’re wondering what happens to a reverse mortgage borrower’s home after they pass away. Many assume the bank owns the home, but this is simply a misconception.
There are different ways to repay a reverse mortgage when the loan becomes due. As we covered earlier, there are no monthly mortgage payments required with a reverse mortgage loan.3 This means the loan is repaid when the last borrower or eligible non-borrowing spouse passes away or leaves the home. There are different options available when that time comes, but it’s important to note that any heirs are not personally responsible for paying off the loan. They are, however, responsible for deciding how the debt is paid.
How can a reverse mortgage be paid off?
Any heirs to the estate will have several options to choose from upon receiving a “due and payable” notice from the reverse mortgage lender sent to the borrower’s estate upon the owner’s death. Heirs are given 30 days to decide how they’d like to proceed in paying off the debt.4
- Sell. Proceeds from the sale of the home can be used to repay the reverse mortgage balance and, if the proceeds from the sale are less than the loan balance, FHA insurance will cover the shortfall. Should the proceeds be greater than the loan balance, the additional funds would go to the heir(s) or estate.
- Keep. The home can be kept by the heir(s) or estate if they choose to purchase the home. It’s important to note that loan balance must be paid in full or at 95% of the home’s appraised value – whichever amount is less.
- Deed. It is possible to deed the home to the lender. This process is called “deed in lieu of foreclosure” and allows the decision maker to legally transfer the title (ownership) of the home to the lender.
- Walk. If the home is ultimately worth less than the loan amount, that is the lender’s responsibility. Heirs can walk away with no personal financial liability.
Although they’re misunderstood and may not make financial sense for everyone, reverse mortgage loans offer a wealth of possibilities to many homeowners in or approaching retirement.
Whatever your personal financial situation, the bottom line is, planning ahead and making gradual changes can be critical for retaining your independence and staying in your home for as long as possible.
If you are one of the growing number of people planning to age in place in the home they love, contact the Longbridge team today to explore your options and see if a reverse mortgage is the right fit for you. We’re here to help!