“Study the rules so that you won’t beat yourself by not knowing something.” – Babe Didrikson Zaharias
Have you watched nervously as the the investments in your 401(k) rise and fall amid a volatile market leading into the years you plan to retire? There’s a good chance the value of your home is rising in today’s environment. So, rather than take money out of your retirement plan when it may be low, why not leverage money out of your home when it is high? You know the old adage, “buy low and sell high.”
Having a buffer asset can help manage sequence of returns better and make a retirement income plan more efficient.A reverse mortgage can reduce the risk of outliving our savings by allowing us to use loan proceeds during down markets rather than tap a shrinking nest egg at the wrong time.
If you’ve dismissed reverse mortgages in the past as inappropriate, they are worth a second look.
One of the positive changes with reverse mortgages has been the decline in initial costs. The upfront costs have gone down from the 2.5% range to 0.5% of the loan amount. While costs will vary among lenders, there is one lender currently offering a $125 one-time cost option for the credit line (assumes a home value of at least $400k).
The Reverse Mortgage Stabilization Act of 2013 now prevents reverse mortgage borrowers from using too much equity too soon and protects spuses who are too young to be co-borrowers on the loan by ensuring they can remain in the house after the older spouse dies.
Unlike a traditional mortgage or home equity line of credit, borrowers do not need to meet income qualificaitons. Some other basics are that they are only available to homeowners 62 years and older living in condominiums and single family homes. The borrowers retain title to the property and can continue to live in and own the home for as long as they choose. There are no monthly mortgage payments during the life of the loan. Proceeds are tax-free and can be used for any purpose (including long-term care expenses).
The loan amount depends on the borrower’s age, appraised value of the home, current interest rates, and the type of revers mortgage selected. A reverse mortgage is not repaid until the borrower moves out of the home permanently. The repayment amount cannot exceed the value of the home, regardless of the loan balance. Once the loan is repaid, any remaining equity/profit is distributed to the borrower or the borrower’s estate. The home doesn’t necessarily have to be owned free and clear to qualify for a reverse mortgage.
Proceeds may be paid out as a lump sum, in monthly payments, as a line of credit, or a combination. If a reverse mortgage is distributed as an annuity I strongly recommend against choosing this method of payment. Such distributions may be considered income in the context of Supplemental Security Income (SSI) and cause the loss of such benefits.
Investors and financial advisors need to start thinking about home equity, including reverse mortgages, as part of the retirement income planning process. At a minimum it is wise to use as a personal safety net and risk management tool. You own your home, it is yours, and it is a key component of your net worth.
Test your knowledge of reverse mortgages with a quiz at: https://www.financialexpertsnetwork.com/
Blake Parrish
Senior VP, Portfolio Manager
Phone: (503) 619-7237
E-mail: blake@bpfinancialassoc.com
Certified Financial Planner Boardof Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”