Is keeping up with rising prices of groceries, gas, electricity and the overall cost of living a concern for you? Has your home increased in value as you watch your investments diminish? Are you concerned about maintaining monthly cashflow?
If you answered yes to any of these questions, then considering a federally insured reverse mortgage may be worth your time. It could be just the right tool to keep you in your home through your golden years, all while receiving tax-free income.
Reverse Mortgages on the Rise
The confluence of stock market uncertainty, a worldwide pandemic and global unrest has caused skyrocketing inflation that, in turn, has led to stressful days and sleepless nights for many retirees worried about their financial futures. Two-thirds of older adults view inflation as having a negative impact on their retirement plans, according to American Advisor Group’s Modern Retirement Survey. Some 53% said that today’s cost of living exceeds what they had expected, and more than 33% stated that they have less money than they expected to have. They also fear that they will outlive their nest eggs. A full 37% reported that they need more cash on a monthly basis.
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Download Now!“If someone has retired recently or is planning to retire, they need to look at all the options out there to deal with these higher costs,” said Steve Vieira, director of mortgage operations and sales for AAA Northeast. More and more retirees who find themselves house-rich but cash-poor have landed on the same option.
According to the federal department of Housing and Urban Development (HUD), a growing number of home-owning retirees have taken advantage of reverse mortgages as a way to unlock their home equity, thus increasing their available funds and creating a more stable financial future. “The spike in inflation has and will continue to put a huge burden on seniors with fixed incomes,” Vieira said. “This has sparked much more interest in leveraging the equity that was built up in the last couple years to supplement retirement plans.”
How a Reverse Mortgage Works
A Home Equity Conversion Mortgage (HEMC) is a loan available to those age 62 and over borrowed against the equity owned in a home. Instead of making monthly payments as with a traditional mortgage, borrowers receive payments from their lender. The loan then becomes due when the house is sold, or when the last surviving borrower dies.
Borrowers have flexibility in how they use the funds they receive from a reverse mortgage. The money can be spent on monthly expenses, health care costs, travel and other activities. Maintaining the home, as well as keeping up to date on all utility payments and taxes, remain the responsibly of the borrower.
How Much Money Can a Reverse Mortgage Provide?
HEMCs are federally backed by the department of Housing and Urban Development. The current mortgage limit for 2023 is $1,089,300. How much of that a homeowner receives is calculated based on a HUD formula. Current interest rates, the age of the youngest homeowner and the home’s appraised value are all taken into account. Older homeowners and those with greater equity in their home receive higher mortgage amounts.
The borrower has four options to choose how they may receive their payments once the loan has been approved:
- Lump sum distribution.
- A monthly payment in a fixed dollar amount for a length of time that the borrower chooses.
- A monthly lifetime distribution (known as a tenure payment).
- Through lines of credit that allow the untapped funds to grow in value over time.
Although the borrower is responsible for closing costs, Vieira advises that in most cases the majority of these fees can be incorporated into the loan. This results in minimal out-of-pocket costs for the borrower during the application process.
Is a Reverse Mortgage a Safe Option?
HECMs are insured by the federal government, which has instituted regulations making reverse mortgages even safer than they were years ago. Most notably, HUD requires all borrowers receive educational counseling before executing the loan to ensure that the individual understands all areas of the reverse mortgage process.
Separately, it’s important to know that a reverse mortgage does not impact the borrower’s Social Security benefits, Medicare, Supplemental Security Income or Medicaid benefits. It simply allows the borrower freedom from monthly mortgage payments as long as they remain living in the home as their primary residence.
AAA is here to answer all of your reverse mortgage questions. Learn more now or join one of our free reverse mortgage webinars.
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I urge caution when clients ask about reverse mortgages. The terms and conditions are very confusing to most folks, and the true cost (accrued interest, fees, penalties, restrictions) is often discovered after the homeowners become incapacitated or pass away. Make sure to discuss your goals with an attorney and a Personal Financial Planner or another trusted independent financial advisor before signing anything. Also, I recommend talking to anyone who might be responsible for handling your affairs if you become unable to. I have seen firsthand that reverse mortgages can be extraordinarily costly to the homeowner and (later on) to their estate. There is typically a very short time limit for either paying off the balance due or selling the home if there’s a default. Be wary of high pressure tactics and slick advertising. Ask questions and make sure that it’s right for you.