How Homeowners Above 62 Are Living For Free: Reverse Mortgages

How Reverse Mortgages can be beneficial for retirees

Chris Clasby

Chris Clasby

Mortgage Professional

If I told you that you could stop paying your mortgage, stay in your home forever, maintain your equity position in the home, AND be able to pass the home down to your heirs, would you be interested? 

There are a lot of misconceptions about reverse mortgages and they tend to get a bad reputation from those who don’t actually understand them, which is why I put together this article to help you get a better understanding of what a reverse mortgage actually does, and how it can help supplement your retirement so that you can enjoy doing the things you love.

We understand how difficult it can be to prepare for retirement, which is why we’re here to help you understand that it’s not too late!

If I told you that you could stop paying your mortgage, stay in your home forever, maintain your equity position in the home, AND be able to pass the home down to your heirs, would you be interested? 

There are a lot of misconceptions about reverse mortgages and they tend to get a bad reputation from those who don’t actually understand them, which is why I put together this article to help you get a better understanding of what a reverse mortgage actually does, and how it can help supplement your retirement so that you can enjoy doing the things you love.

We understand how difficult it can be to prepare for retirement, which is why we’re here to help you understand that it’s not too late!

So, what is a reverse mortgage?

When you have a traditional mortgage, you pay your lender every month to buy your home over time. With a reverse mortgage, instead of paying your mortgage every month, the lender pays YOU in exchange for a portion of your equity. So it’s similar to that of a cashout refinance of a traditional mortgage. The most common type of reverse mortgage is a Home Equity Conversion Mortgage (HECM) which is what we’re going to be talking about today. Just as it sounds, you are converting a portion of your equity into tax-free cash disbursement(s). These cash disbursements, along with the elimination of your monthly mortgage payment, can be a fantastic supplement to retirement income for qualified borrowers.

Retirement Statistics and Concerns

  • Housing expenses account for 35% of the average retiree’s income

  • 70% of Americans don’t have a written retirement plan

  • 65% of Americans are concerned about Social Security running out

  • 30% of Americans made early retirement account withdrawals during the COVID-19 crisis

  • 40% of American retirees receive ONLY social security income during retirement

    • Only 6.8% receive social security, a defined benefit pension, and a defined contribution plan

Let’s say a retired married couple both are making just social security income, $2,000 each a month, so $4,000 total. Their mortgage payment with property taxes and insurance is $2,400. Let’s also say they each have a car payment of $300. They’re now down to $1,000/mo to eat, pay gas/electricity, water bill, phone bill, auto insurance, etc… How are they supposed to golf?!? Or take a little trip to Florida in the winter? Or buy Christmas and birthday gifts for their grandchildren?

This is not an uncommon example!! We come across scenarios like this on a regular basis.

It’s no secret that the average American doesn’t properly prepare for retirement, yet many of them are homeowners and have accumulated substantial equity over the years of being in the home. It’s time for some of those folks to leverage that equity to improve their day-to-day lives in retirement!

How does it work? Well, you have options…

Here are the options of how you can access the cash with a HECM, depending on your goals:

  • One lump-sum payment upfront at the closing of the loan

  • Monthly disbursements over a set period of time

  • Monthly disbursements for as long as you own the home

  • A line of credit that you can draw from as needed

  • A combination of a line of credit and monthly disbursements

These options will all have different terms associated with them, so it’s best to work with a knowledgeable loan officer to determine which product best aligns with your long and short-term goals.

Just like conventional loans, HECM’s come with fixed and variable interest rate options. This is the interest due on the money disbursed to the homeowner over the course of the loan. These disbursements never need to be paid back to the lender or bank. The only way to obtain a fixed-rate HECM is to take the lump-sum payment up front. The other four options will always be adjustable.

If your goal is to keep as much of your equity as possible, then just the line of credit is probably the best option for you – You’ve now eliminated your monthly mortgage payment AND you still have access to the funds in case anything comes up, but you don’t need to draw from it regularly, thus, remaining in your current equity position.

If you don’t really have any heirs to pass the home down to, and you just want as much cash from your equity as possible, then perhaps you would take both a line of credit AND a regular monthly distribution.

Scenarios where the loan can become due

  • Last surviving borrower or eligible non-borrowing spouse dies

  • The home is sold or the title of the property is transferred

  • The borrowers no longer live there as their principal residence

  • The borrower fails to pay property taxes and/or homeowners insurance

  • The borrower fails to keep the property in a livable condition

If the last surviving spouse or eligible non-borrowing spouse passes away, the family/heirs can still keep the home by refinancing the balance of the reverse mortgage into a traditional mortgage and make the payments going forward.

Requirements For Qualifying

  • The youngest borrower on the loan is age 62 or older

  • The home must be your primary residence

  • Must have 50% or more equity in the home

If you fit these criteria, and you’re feeling like it’s a struggle to make ends meet with your current mortgage payment and other bills, then give us a call for a free consultation to see if a reverse mortgage would be a good fit for you!

Want to learn more? Click here to to get in touch with Mortgage 101 today.

Sources:

  • Vision Retirement. (2022, March 3). Biggest expenses for retirees & how to minimize them. Vision Retirement. Retrieved April 13, 2022, from https://www.visionretirement.com/articles/biggestretirementexpenses

     

  • New report: 40% of older Americans rely solely on Social Security for retirement income. National Institute on Retirement Security. (2020, January 14). Retrieved April 13, 2022, from https://www.nirsonline.org/2020/01/new-report-40-of-older-americans-rely-solely-on-social-security-for-retirement-income/#:~:text=Only%20a%20small%20percentage%20of%20older%20Americans%2C%206.8%20percent%2C%20receive,from%20Social%20Security%20in%20retirement

     

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