It’s safe to say that in today’s economic landscape, we could all use some extra cash. With the prices of food, transportation, and even prescriptions surging, funding even the most basic of daily living expenses can prove challenging. And for retirees adjusting to a reduced or fixed income, today’s higher prices can seriously jeopardize their retirement savings and financial wellbeing. Just consider this: in 2023, the average Social Security check is $1,701.62 per month.1 But with the average retiree household spending $50,220 per year2 – or $4,185 per month – Social Security benefits alone are not nearly enough to make ends meet. So, what can you do?
For many seniors, tapping into home equity via a Home Equity Conversion Mortgage (HECM) – also known as a reverse mortgage, is the solution. With senior homeowners accounting for over $12 trillion in housing wealth,3 leveraging the equity you’ve built up in your home could be a smart way to supplement your retirement income.
Naturally, this begs the question, “How much money can I access with a reverse mortgage?” The short answer is, “It depends.”
The money you could receive from a reverse mortgage is called the principal limit and accounts for several variables such as your age, home value, interest rate on your loan, and method of payout distribution. There are three main ways you can opt to receive your funds from a reverse mortgage: a lump sum payout, monthly payout, or line of credit.4 So which distribution method is right for you? Read on as we cover each of these in greater detail.
- Lump Sum
As the name suggests, a lump sum is a single disbursement payout of your reverse mortgage funds. A lump sum has a fixed interest rate, so you will not need to account for any future fluctuations. However, with this payout method, the maximum amount that can be obtained is 60% of the principal limit in the first year.5 It is also worth noting that the amount of proceeds available in a lump sum may be lower as compared to other payout methods. This is because you will need to pay interest and fees on the entire loan amount drawn at closing. While lump sum distribution is a popular option among borrowers, it’s important to consider the risk it poses to younger borrowers who could potentially outlive their loan funds.
You may consider a lump sum payout if:
– You’re looking to payoff/eliminate an existing mortgage loan or consolidate other debt
– You have plans to relocate or purchase a new home with a HECM for Purchase
– You want the maximum amount of money upfront at the time of closing - Monthly Payout
A monthly payout offers a set scheduled payout to supplement your income. This distribution method has an adjustable interest rate and as such, is subject to fluctuation. It also comes at a lower cost than a lump sum payout because you are only required to pay interest and fees on the money that has been actually drawn. Many borrowers value having a source of regular, predictable income via the monthly payout method. This method also offers further flexibility with two options for payout – term and tenure:
Term
Term payouts allow you to receive monthly payments of equal amount for a designated set period – for example, five or ten years. Since there is a timetable for receiving your funds, term payment amounts are almost always higher than tenure payment amounts. You may consider a term payment if you want to sell your home and relocate in five years, or delay collecting Social Security to reach full retirement age and the maximum benefit.
Tenure
Not tied to a specific timeframe, tenure payouts allow you to receive monthly payments of equal amount for as long as you live in your home (as long as you keep current with your loan obligations, like property taxes, insurance, and maintenance). As compared to the term payout option, tenure payment amounts tend to be smaller since the timeframe is open-ended. However, one of the biggest positives of the tenure payout is that funds are guaranteed as long as you keep current with your loan obligations. Even if you reach age 110 or your loan balance exceeds your home’s value, you will still continue to receive your tenure payment each month.6
You may consider a monthly payout if:
– You’re seeking a regularly scheduled source of income – either for a set timeframe or indefinitely
– You want flexibility in how you receive your funds – even set term payouts can be changed as you wish - Line of Credit
The most versatile distribution option, a line of credit, has an adjustable rate and allows you to draw some funds at the time of closing and leave some available for the future. A major benefit of this distribution method is that you only pay interest and fees on the amount you withdraw. Any unused portion of the credit line continues to grow over time.7 This makes a line of credit an ideal distribution method for borrowers looking to cover future cash needs. In fact, if left long enough, your line of credit could eventually grow to become greater than your home value!
You may consider a line of credit if:
– You want to establish a “rainy day fund” or set aside savings for emergencies or unexpected future expenses
– You’re seeking a budget source to fund events such as annual vacations, travel excursions, etc.
It’s important to note that in addition to the three reverse mortgage payment methods covered above, you can also choose to receive your funds via a combination of them. For example, some borrowers opt for a combination of a lump sum and line of credit so they can first pay off an existing mortgage or consolidate other debt, and then establish a credit line for future expenses. Since there is no single distribution method that works for everyone, deciding which method (or combination of methods) works best for you and your needs is key.
With the flexibility to choose how you receive your funds, the possibilities for how you leverage cash from a reverse mortgage are truly endless! And as you settle into retirement years, this money could come as a welcome source of cash flow.
At Longbridge Financial, reverse mortgages are all that we do. We’ll get to know you, your goals, your home, and your finances as we discuss your options. And we will help you determine which reverse mortgage solution is right for your unique situation. Not all lenders make this commitment.
Isn’t it time you unlock the power of your home equity? For more information, contact the Longbridge team today.
