Two ways to utilize a reverse mortgage
Reverse mortgages have gone through many transformations and improvements in recent years. No longer considered “loans of last resort,” they are becoming increasingly popular with homeowners age 60 and up who have equity in their homes and want to bolster their nest egg.
In short, reverse mortgages can pay off and replace a traditional mortgage loan, reducing the burden of a mandatory monthly payment — and resulting in immediate savings.
That savings can be used in a variety of ways, but let’s focus on just two: purchasing a new home and creating a buffer asset.
Buying a new home
Qualified buyers age 62 and older can purchase their next primary home with a reverse mortgage. It’s called a Home Equity Conversion Mortgage (HECM) for Purchase. And it’s tailored to better suit the needs of the growing number of aging home buyers.
Whether you want to upsize to the home of your dreams or downsize to a home more suited for your long-term needs, using an HECM for Purchase may be a better option than paying cash or taking out a 15-, 20- or even a 30-year mortgage at this stage in life.
Simply put, a HECM for Purchase loan combines a reverse mortgage with the equity from the sale of your previous home — or from other savings and assets — to buy your next primary home in one single transaction.
Regardless of how long you live in the new home or what happens to your home’s value, you only make one down payment of roughly 50 percent towards the purchase, provided that you pay property taxes and homeowner’s insurance, maintain the property, and occupy the home as your primary residence.
Once the purchase is complete, you can choose to make payments on the mortgage, or defer payback until the last remaining borrower permanently leaves the home. There is no mandatory mortgage payment, making this a great way to preserve cash flow later in life, while aging in a safe place suitable for long-term needs.
Using home equity as a buffer
Some astute investors will set up a “buffer asset,” which is a bucket of money outside their investment portfolio that can be strategically used when needed.
The wealthiest people typically have enough cash saved to ride out shifts in the market so they don’t need to tap into their portfolios during economic downturns.
Most folks nearing retirement or currently retired don’t have that kind of cash lying around.
But homeowners 60 and up do have what is usually their largest asset: their home. Monetizing the home with a reverse mortgage is a safe and effective strategy to create a buffer asset of tax-free money that can be used for comprehensive financial planning.
With adjustable-rate reverse mortgages, qualified homeowners can establish a line of credit as a bucket of cash — guaranteed to be there in reserve until needed. The line of credit comes with a guaranteed growth rate of .5 percent over the loan’s interest rate, giving you more borrowing power each year it’s in place.
Interest rates on these loan products are subject to change, but consider this example. A 65-year-old borrower who takes out a reverse mortgage at an interest rate of 3 percent would see a growth rate of 3.5 percent. If that borrower opens a $100,000 line of credit, in 20 years that line of credit will be worth $204,000, provided that no withdrawals were taken from the $100,000. (There are no time restrictions on HECM lines of credit; however, jumbo reverse mortgage credit lines do have a 10-year draw period.)
Reverse mortgages also can help meet income needs in the event of a down market, preventing you from locking in market losses or having to sell stocks at a loss for living expenses.
Strategically accessing home equity with a reverse mortgage during times of economic uncertainty can give your portfolio an opportunity to recover from a market drop.
Incorporating housing wealth during retirement years can limit the amount of money you need to draw from your investment portfolio, allowing those assets to grow at a higher rate. Using all of your assets instead of just some can extend the longevity of your nest egg.
Most people don’t think of reverse mortgages as a way to extend the longevity of an investment portfolio, but today’s reverse mortgages are now recommended by some financial advisers and retirement researchers as part of a comprehensive financial plan to increase cash flow and help create a more comfortable retirement.
Because reverse mortgages are federally insured, they can never be suspended, frozen or reduced regardless of what happens to the home value or market conditions so long as the terms of the loan are met.
Reverse mortgage borrowers must pay 2 percent of the home value, either up front as part of the closing costs or financed into the loan.
Also, 0.5 percent of the ongoing mortgage balance is added to the loan each year for federally-backed insurance, which makes reverse mortgages non-recourse loans. In other words, no debt from the reverse mortgage loan can be passed on to your heirs or your estate when the loan becomes due and payable.
Most other costs — such as title, municipality, counseling and appraisal fees and mortgage insurance premiums on federally-backed reverse mortgage loans — can be financed in the loan. The origination fee is subject to the lender.
To be clear, reverse mortgages aren’t for everyone. Take ample time, explore your options and seek professional advice before deciding if this is the right option for you.
Steven J. Sless, CLTC® (NMLS: #298581 MLO: #49963) is president of The Steven J. Sless Group of Primary Residential Mortgage, Inc., the lender’s national division dealing exclusively with reverse mortgages. For more information, visit TheStevenJSlessGroup.com, call (410) 814-7575 or follow @MoreWithSless on Facebook, Twitter, LinkedIn or Instagram.