Homeownership represents stability in a housing market with vastly fluctuating rent payments. Thanks to the Recession, fewer Americans own homes but amongst the older generations, home ownership remains significantly higher than renting as a housing option. Even if a homeowner’s retirement plan does not include remaining in the same home over time, ownership provides options that simply don’t exist for renters by providing several ways to tap into a home’s equity such as downsizing, getting a home equity loan, home sharing, or taking out a reverse mortgage. Although retirees won’t find a one-size fits all approach works for everyone, reverse mortgages continue to play a significant role in retirement planning options. In April of this year, the federal government implemented new rules to prevent some of the problems people experienced with reverse mortgages in the past.
Unlike other mortgage options, reverse mortgages are designed for people 62 and older and provide them with the means to tap into their home equity without losing their home in the process. Banks base the loan amount on three things, the value of the home, the age(s) of the homeowner(s) and the current interest rate. In exchange for their home equity, homeowners can get monthly payments for as long as they own their home, a lump sum or a line of credit. Homeowners don’t need to repay the loan as long as they continue to live in their home nor do they lose out on any increased value of their home over time as the bank can only get the value of the loan and not any increased value of the home that exceeds the loan amount.
About 10 percent of reverse mortgages go into technical default because the homeowner is unable to pay either property taxes, home insurance premiums or other homeowner fees. The new rules create consumer protection measures to screen potential borrowers to determine whether they can afford to enter into a reverse mortgage. Consumers must demonstrate an ability to pay property taxes and other fees based on their income and available credit.
Typically, consumers often choose to consider reverse mortgages when they come up against unexpected expenses as a sort of loan of last resort but a reverse mortgage may be more beneficial if used more strategically.
One option is to use a reverse mortgage at the beginning of retirement to allow a retiree the option of postponing withdrawing funds from an investment portfolio and allowing it to continue to grow or to protect against significant losses by preventing the need to withdraw funds when the market is in decline. If the reverse mortgage is used as a line of credit, it could allow the retiree to tap into home equity when the market is down. If the market rebounds, the funds from the market can repay the reverse mortgage.
Just as you can use the reverse mortgage funds to hold off on withdrawing from a portfolio, the reverse mortgage funds can also be used to allow Social Security benefits, pension, 401(k) or IRA plans to continue to grow.
Finally, a reverse mortgage could be used to swap debt for income by paying off a traditional mortgage with funds from a reverse mortgage.
There are risks to using reverse mortgages but they provide another tool in your retirement toolbox and shouldn’t be eliminated out of hand. Do your due diligence, consult with a reputable reverse mortgage specialist and then decide whether you should incorporate a reverse mortgage into your retirement plan.
If you have a question about reverse mortgages, Laura Kiel will be on with Rajiv Nagaich this Saturday. Get answers to your reverse mortgage questions by calling 877-76-AGING (762-4464) or listen to the podcast after the show. Laura Kiel, along with her husband Dan, co-founded Kiel Mortgage, Inc in 1996. She has been the familiar public voice that has been heard by millions on the airwaves. Laura served as a Commissioner on the Washington State Mortgage Broker Commission from Jan 2004-Dec 2007. As a part of this Commission, she was crucial in developing new and sweeping consumer protection legislation and mortgage regulation. Her work was instrumental in re-writing the Mortgage Brokers Practices Act which enacted Loan Originator licensing for the state of Washington in 2007. As a result of her efforts the new act is now a model for the entire nation. Laura has truly been a fearless fighter and advocate for consumers. She is excited to continue to provide exceptional customer service and loan products to families in the Pacific Northwest. Find Laura’s site at KielMortgage.com.
