If you want to clear the room, talk about reverse mortgages. That way you can enjoy the appetizer and then help yourself to the rest.
But people shouldn’t shy away from talking about tools that can be used to improve financial security in retirement under the right circumstances.
So said Don Graves, founder of the Housing Wealth Institute, in a recent episode of the Decoding Retirement podcast (see video above or listen below). “It’s not scary,” he said. “It’s not dangerous…it’s just a mortgage.”
According to Graves, a reverse mortgage, specifically a Home Equity Conversion Mortgage (HECM), is a federally insured loan for retirees 62 and older that allows them to convert part of their home’s value into tax-free dollars without giving up ownership or paying a monthly mortgage.
“It’s just a home equity loan for people 62 or older, giving them access to dollars without the burden of mandatory monthly principal and interest payments,” he said.
The reverse mortgage has a long history. It originated in 1961 and received federal support in 1988 through the HECM program. Internationally, these financial products are marketed using more accessible terms. In the UK, they are often referred to as “lifetime mortgages” or “equity release” products, which more clearly describe their function: converting home equity into funds that can be used in retirement while allowing homeowners to continue to own their homes.
Graves said that about 98% of reverse mortgages in the United States are HECMs, which are insured by the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development.
These federally backed loans provide important consumer protections and standardized terms that help establish reverse mortgages as a legitimate financial planning tool for eligible homeowners.
Who should consider a reverse mortgage?
To be sure, reverse mortgages are not for everyone.
Graves said that in his 26 years in the industry, he has contacted 16,000 people, and only 3,000 of them have finally obtained a reverse mortgage. This resource may not be suitable for those who do not plan to live long-term, have no strategy or funding needs, and do not need an additional source of income.
However, Graves said that certain types of homeowners should consider reverse mortgages. They include homeowners over 62 who plan to stay in their current home for a long time; homeowners who want to increase cash flow, reduce risk, preserve assets or increase retirement savings; and homeowners who want to eliminate mandatory monthly mortgage payments to free up cash flow.
Graves believes retirement will be more expensive and less predictable in the future. He explains that most retirees rely on three traditional sources of income: employment, investments, and income from Social Security and/or pensions. “And that income has to sustain them in retirement,” he says.
When faced with the critical question of “Is it enough? Is it livable?” most honest retirees will say, “I don’t think it is,” Graves says.
That’s why another resource that 87% of American retirees have — home equity — may be the answer to better retirement security.
“You’ve got a fourth bucket,” Graves says.
“What if we could turn your property into a growing reserve fund? Could that increase your cash flow, reduce risk, preserve your assets, improve liquidity, and even add new money to your retirement savings?” he adds. “The modern reverse mortgage is designed to accomplish all five of those goals.”
How a reverse mortgage works
The amount of a reverse mortgage depends on the age of the youngest spouse, the value of the home, and projected interest rates, according to Graves. The line of credit grows over time and is currently around 7%, he says.
Some common uses for reverse mortgages include eliminating existing mortgage payments, establishing a growing line of credit for future needs, and supplementing retirement income. Retirees can also use reverse mortgages to build health care and long-term care reserves, assist with tax management strategies, and create a volatility buffer for their portfolios during market downturns.
To maintain a reverse mortgage, the homeowner must continue to live in and maintain the property, pay property taxes, and maintain homeowners insurance.
The loan becomes due when the last surviving borrower moves, dies, or enters a nursing facility for more than 365 consecutive days.
Of course, reverse mortgages are not without costs, including upfront costs like mortgage insurance, origination fees, and standard closing fees.
Notably, consumer protections are in place, including mandatory counseling by an FHA-approved agency. In addition, a reverse mortgage is a non-recourse loan, meaning the borrower will never owe more than the home is worth.
Actionable advice
If you plan to continue living in the house, it’s wise to set up a reverse mortgage early because it has a compounding effect, Graves said.
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