Reverse Mortgage, The Not So New Financial Planning Tool
Until recently, seniors 62 years of age and older have not had the best of choices when it came to getting cash from their homes. Traditional home loans only offered the option of either selling one’s house or borrowing against its equity. Obviously, this meant moving into a new home or taking on monthly repayments; not exactly the most appealing choices for those who have put down permanent roots.
Reverse Mortgages are the dawn of a new age. The borrowers who are taking out Reverse Mortgages were raised under the mantra to get a 30 year or even better a 15 year fixed mortgage and pay your home off and live mortgage free during retirement. Well most are finding out that may not have been the best advice nor the best course of action.
How Reverse Mortgages Work
Reverse Mortgages are a way for homeowners age 62 and older to borrow money using their home equity as collateral. When you take out a reverse mortgage you first must pay off the current balance. Once the mortgage is paid all that will remain is the monthly taxes and the insurance. There are no income or credit qualifications. The loans do not have to be repaid until the owners move out or die. The money received is not taxable and does not count towards income or affect Social Security or Medicare benefits.
Reverse Mortgages and Financial Planning
Reverse Mortgages are wonderful financial planning tools and should never be used to fund an immediate crisis. A reverse mortgage can offer senior homeowners the ability to strengthen both their current financial cash flow challenges as well as help protect their financial future. When a senior homeowner utilizes these funds to purchase investments that protect their health and well-being and enhance the total worth of their estate, the value of a reverse mortgage is truly realized.
- Long Term Care Funding – About 60% of the population will require some form of long-term healthcare services during their remaining lifetimes. A combination of home care, assisted living and nursing homes stays can last three to five years or longer. A senior’s average stay in a nursing home is about 2.5 years and the costs can easily exceed $90,000 annually. Home care can be expensive as well. Proceeds from a reverse mortgage loan for paying long-term care insurance are typically set up as a monthly income to ensure money is available through the life of the policyholder
- Retirement Income During Stock Market Declines – Take for example the infamous “Lost Decade” of the 2000 to 2010 stock market: During 2000-2002 the stock market lost approximately 46% of its value. If that was not bad enough in 2008 the stock market loss an additional 38.5%. Nearly 85% of market value lost just in those two periods. A $1 million dollar portfolio indexed to the market would have been worth about $860,000 by 2010 assuming no withdrawals. So take it one step further. If you assume annual withdrawals of $50,000 during that same period you would be left with about $270,000. What if you had the ability to access a reverse mortgage during stock market declines? In this case, utilizing a reverse would have saved a great deal of losses.
- Line of Credit – Utilizing a reverse mortgage as an emergency fund for unexpected emergencies
- Estate Planning – If the senior homeowner uses some of the tax-free equity released from a reverse mortgage to purchase additional life insurance for their heirs, the net result would be larger death benefits for the beneficiaries without affecting the current (and many times, limited income stream of the borrower.) When the insurance policy pays the benefits to the heirs, they receive tax-free dollars.
It is extremely important to set up a reverse mortgage in the beginning of your retirement planning process. It should be done in conjunction with your overall planning or not considered at all. You can not depend on regulatory, borrower qualifications or home values down the road.
Risks of Reverse Mortgages
Contrary to the slick TV spots by Robert Wagner or Henry Winkler, reverse mortgages are complicated financial instruments. It is important that the client understand what they are getting and the risks involved.
- Contrary to popular belief reverse mortgages can be foreclosed. If the owner fails to pay the homeowners insurance or taxes or fails to maintain the property the owner is deemed to be in default and the owner is in danger of foreclosure.
- Another risk is when borrowers take out a lump sum versus periodic payments. Oftentimes retirees need a Reverse Mortgage to meet basic living expenses and use up their equity and have nothing left in the remaining years.
- Another common risk are borrowers who do not put the younger spouse on the deed of the home or an unscrupulous mortgage lender advises the homeowner to take the younger name off the deed, maybe they are too young for the mortgage or the younger borrower makes the payments lower. Either way this is not advisable under any circumstance and can lead to the widow being homeless. There are pending lawsuits regarding this issue so at the time of this reading this could have been changed.
We will help you fully understand the benefits of Reverse Mortgages. They are a great financial planning tool. Contact us via email or give us a call now at (804) 282-8820!