Reverse Mortgages No Longer Just For Cash-Strapped Homeowners, But They Can Be Complicated | Seattle Times
After the sudden death of her husband following a fall in 2016, Marjorie Fox decided to postpone any important decision. She waited two years to retire as a financial planner and three years to sell her house and buy a lakeside townhouse in Reston, Virginia. For added protection, she took out a reverse mortgage on her new home.
Fox, 75, had set aside $150,000 in a cash reserve, and the reverse mortgage was another backup. If something unexpected happened, “it could be when the stock market is down and it could be an inopportune time to sell assets,” she said. Reverse mortgage borrowers can take the money as a lump sum, fixed monthly installments or a line of credit. Fox chose a line of credit, which she could use if needed.
Within a year, his cash reserve was depleted and Fox began withdrawing money from his reverse mortgage. Among his expenses: $50,000 for emergency dental care and a deposit to reserve a place in a retirement community that will open in 2025. Unused money from the line of credit earns interest.
Until recently, it was common knowledge that a reverse mortgage was an option of last resort for older homeowners in desperate need of cash. But a growing number of researchers say these loans could be an option for people earlier in retirement like Fox who aren’t in need at all.
Homeowners in their 60s and early 70s could use the cash from a reverse mortgage to protect their investment portfolios during market downturns, to delay applying for Social Security benefits, or to pay large bills. medical.
“The best use of this tool is to provide and supplement income during retirement,” said Craig Lemoine, director of the financial planning program at the University of Illinois, Urbana-Champaign. “A young retiree can stay in the house while turning equity into a source of income.” Lemoine is also executive director of the Academy for Home Equity in Financial Planning, a group of finance and housing experts.
With a reverse mortgage, homeowners age 62 and older can borrow against the value of their home. The loan and interest on the money that was taken out matures when the last surviving borrower or eligible non-borrowing spouse dies, sells the house, or leaves for more than 12 months, perhaps to move into assisted living.
When you apply for a reverse mortgage, you must take the maximum amount you are entitled to, but the money you don’t use immediately – for example, the unused part of a line of credit – is in a special account which earns interest. Only the money actually withdrawn from the account is charged interest, and this is called the loan balance.
Most reverse mortgages are home equity conversion mortgages, known as HECMs, which are insured by the Federal Housing Administration. The loan is “non-recourse,” which means the FHA guarantees that a borrower will never owe more than the value of the property when the loan is repaid.
In exchange for this security, borrowers pay an upfront FHA mortgage insurance premium that is based on the appraised value of the home and can be up to $19,400. Lender origination fees could be as high as $6,000, and the lender charges typical closing costs for any mortgage. These upfront costs can be paid with cash from other sources or reverse mortgage proceeds and repaid later with interest.
“Because of the fees, we generally say that if you think you won’t be in the house for five years, a reverse mortgage might not be something you want to do,” said Shelley Giordano, an executive at Mutual of Omaha Mortgage. who advises loan officers and financial planners on the use of home equity in retirement planning.
The loan amount is based on your age, interest rate and home value, up to an FHA appraisal limit of $970,800 in 2022.
You can get an idea of how much a HECM (pronounced HECK-um) will pay by using the calculator at RetirementResearcher.com, which is run by Wade Pfau, co-director of the American College Center for Retirement Income in King of Prussia, Pennsylvania. .
Let’s say you’re 65 and your house is worth $1 million. Assuming about $26,000 of upfront costs are rolled into the mortgage, you would qualify for a credit of about $420,000. It could stay in a line of credit until you need it. Alternatively, you can set up “occupancy” monthly payments of $2,130 from the line of credit for as long as you stay in the house, or “term” monthly payments for a fixed term (perhaps 2 $780 for 20 years). The unused credit balance—perhaps the money that will eventually go toward monthly payments—in the line of credit grows at the same variable interest rate as the interest charged on any loan balance.
Use a reverse mortgage
Fox said his reverse mortgage was part of an overall financial plan. She lives on required minimum distributions from her individual retirement account as well as income from maturing bonds in a taxable account, Social Security, and a survivor benefit from her husband David’s company pension.
When she opened the reverse mortgage, she was allowed to borrow $370,000, most of which is still unused in her line of credit. At this point, she owes $81,000, which includes the money she took out of the line of credit for expenses and accrued interest. Because the still untapped funds in the line of credit are earning interest, her available borrowing limit — the size of her line of credit — is now $329,000, she said.
If she needed the extra money, Fox said she’d rather withdraw tax-free funds from her reverse mortgage than pay income tax on additional withdrawals from her IRA or tax on capital gains on sales of shares in his taxable account.
HECM will also provide flexibility when it comes to paying entrance fees to the continuing care retirement community it plans to move to in several years. She could use the proceeds from the sale of a home she co-owns in California, as well as the HECM money. She could sell the townhouse when market conditions are favorable and pay off the loan balance at that time.
“I want to be able to move without having to depend on the townhouse being sold immediately,” she said. “It stresses me out when I think about it.”
Protect the nest egg
Making withdrawals from investment accounts during market downturns, especially early in retirement, can wreak havoc on a portfolio’s longevity. Instead of locking in losses, a retiree who uses a “coordinated strategy” could cover expenses and protect savings by withdrawing funds from a reverse mortgage when markets fall, according to several studies.
“When a portfolio is down, taking something out of it makes it go down more and makes it much harder to recover,” said Barry Sacks, a pension lawyer who has conducted studies that have shown that using a reverse mortgage during market town centers could help keep portfolios on track. .
To use this strategy, Sacks said, retirees should look in January at how their portfolio compares to that of the previous year. If it has gone down because investments have gone down, they should withdraw money for next year’s expenses from their reverse mortgage and allow investments to recover.
Parents who want to preserve their home equity for their children could potentially leave an even larger legacy with a coordinated strategy, said Pfau, author of “Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement.”
Pfau looked at a hypothetical couple, both 62 years old, with an initial home value of $435,000 and $870,000 in investments. Their inflation-adjusted annual income of $76,000 included Social Security.
Using historical data, Pfau found that if the couple had taken out a reverse mortgage after exhausting their portfolio, it would have left their heirs with nearly $1.8 million in home equity tax-free. .
If they used the coordinated strategy, they depleted their home equity, but left $2.2 million of after-tax assets in the portfolio.
“To the extent that people worry about inheritance, they shouldn’t worry about the distinction” between investments and home value, Pfau said.
For those with fewer savings, a growing line of credit could fund other goals, like paying for home health care later in life, Pfau said. “If I open the line of credit earlier and let it grow, I will have more borrowing capacity,” he said.
Pfau also said early retirees could use a HECM as a “bridge” to delay applying for Social Security until age 70. Beneficiaries who wait until age 70 get 77% more in lifetime monthly benefits than someone who collects at age 62.
Caveats to consider
In recent years, the federal government has tightened rules on loans, including limiting the amount a borrower can get in the first year and ensuring that a non-borrowing spouse can stay in the home after the death of the spouse. ‘borrower.
Nevertheless, potential borrowers should be aware of the drawbacks. Although a homeowner may decide to use their loan cautiously – perhaps in the form of annuity-like monthly payments – it could be tempting to spend on unnecessary expenses, depleting the equity in their property long before they die. .
“There is always a danger with a sudden influx of flexible cash,” Lemoine said. He also said a reverse mortgage can be a bad move for someone who is unable to maintain the home and would be better off downsizing or moving to a care facility. And potential borrowers should assess possible future health needs, experts say; a large loan balance could leave borrowers without sufficient equity if they ever had to sell their home and pay for nursing home or assisted living care.
Lemoine suggested that potential borrowers interview several lenders before making a choice. Lenders “can negotiate some closing costs,” he said. All borrowers must attend government mandated counseling sessions. A financial adviser could — and probably should — help someone decide whether a reverse mortgage fits into an overall retirement plan, he said.