Reverse Mortgage: Options for Getting Ahead in Retirement
- posted 5.1.2019
- Taylir Paynter
- Home Loans
If you own your home free and clear or your remaining mortgage is small, you likely have substantial equity in your home. That makes your home not only an asset, but a financial tool that may give you the financial flexibility you need.
Perhaps, when you were younger, you thought of your home as merely a place to live and raise a family, but if you’re older now and contemplating how you’re going to manage your retirement years, you may be interested in the financial options your home provides.
There are several ways to unlock the value of your home. In learning about some of these strategies, try to hone in on the one you believe best applies to your situation and could help you the most.
You’re probably familiar with this concept. Simply sell your current home and buy (or rent) something smaller, presumably for less money and with less upkeep and expense in the form of property taxes, utilities, insurance and other costs.
Downsizing is a straightforward option to free up equity in your home, but there are downsides. Along with selling expenses, there could be capital gains on your sale. Your sale proceeds could also impact long-term medical or nursing care aid you receive from the government.
Cash Out Refinance
A Cash Out refinance is a way of tapping into the equity you have built up in your home as it has increased in value over time, and through your monthly payments that have built equity. It involves retiring your current mortgage by taking out a new one, possibly with different terms, and for an amount that is larger than what you currently owe. The excess over your old loan’s outstanding balance, plus closing costs, and the new one is then paid out to you in cash at closing.
A Cash Out refinance can have a fixed interest rate, so you could have a fixed mortgage payment for the life of the loan. To learn more about how a Cash Out Refinance could help you, consult with a New American Loan Officer today.
Unless you paid cash for your home, you made mortgage payments to your lender who financed your home purchase. With a reverse mortgage, a lender, pays you, based on your age, home value and equity. You get to decide how you want to receive payment, such as a lump sum, a line of credit, monthly installments over a certain period or for life. To be eligible, you must be 62 or older.
A reverse mortgage is a refinance loan, but the loan, unlike a forward mortgage that you likely used to finance your home purchase, doesn’t have to be paid back – not a penny -- until the day you die or decide to sell, or stop residing in the home for a period of 12 months or longer.
The proceeds from a reverse mortgage are not subject to income tax or capital gains tax, and they typically will not affect your Social Security or Medicare benefits.
To receive income for living in your home for as long as you choose will be an appealing option for many retirees. However, when the loan must be repaid (typically through the sale of the home after the borrower’s death), there may be little, or no money, left for heirs to inherit. That’s because the amount owed (loan balance, including insurance costs and compounding interest) continues to grow over the life of the loan.
Reverse Mortgage borrowers never relinquish title to their property. The lender has no ownership interest.
A Reverse Purchase shares many features with a Reverse Mortgage, but while a Reverse Mortgage allows you to age in place in your current home, a Reverse (Mortgage) Purchase allows you to age in place in a new home, which will likely be far better suited for your retirement years. Secondly, because you’re not required to make monthly mortgage payments, you should have less cause to dip into your retirement savings.
How it typically works is, after you sell your current home, you apply a portion of the sale proceeds toward your new purchase. You can also apply personal savings or a cash gift to your total. Your lender -- using a formula based on your age, the home’s value, and prevailing interest rate -- will furnish the additional funds to complete the purchase. Because you don’t have to use all your resources for the new purchase, as you would if you paid all cash, you have more money left for other uses.
Loan repayment for a reverse purchase follows the same guidelines as for a reverse mortgage.
Reverse products don’t carry any prepayment penalty, but borrowers should regard their use as a long -term strategy, which will also help offset the initial costs of taking out either of these loans.
If you own your home or have a small home mortgage, you likely have accumulated significant home equity. To protect yourself and your family, consult with a financial advisor, retirement specialist, or reverse loan expert knowledgeable in all the ways you can now put this equity to work. By law, if you wish to pursue the reverse option, you must also speak with a government-approved reverse counselor from a list your reverse loan originator will provide.
Your homeownership provides you with lots of financial options. Now your goal is to turn those options into real advantages that can best serve your retirement years.