What if you’re close to retirement (or retired) and the bulk of your net worth is tied up in the value of your home?
Such a situation is what experts call being “house rich, but cash poor.”
For many seniors, their largest retirement asset is their home. And so, of course, the financial institutions found a way for folks to tap that money. It’s called a reverse mortgage, which allows people who are 62 or older to borrow against their home’s equity.
Unlike a traditional home loan, with a reverse mortgage the borrower doesn’t have to make monthly payments. The lender doesn’t collect until the homeowner moves, sells or dies. When the home is sold, any equity that remains after the loan is paid off is distributed to the person’s estate. If heirs want to keep the home, they have to pay off the mortgage. At least the loan is limited to the market value of the home.
The loan size depends on the borrower’s age, how much equity is in the home and the current interest rate. The loan can be disbursed as a line of credit, a lump-sum payment, fixed monthly payments or a combination of those.
“Reverse mortgage lenders recognize that baby boomers are aging with billions of dollars in equity in their homes,” wrote Joshua Denbeaux, an attorney and contributor to the Hill. “Reverse mortgages may be a tool that is appropriate sometimes, but it should be considered a last resort.”
If you’re thinking about getting a reverse mortgage, consider some recent policy changes that might not make the loan such a good idea.
In a rule change last year, the Department of Housing and Urban Development increased the upfront cost of these federally backed loans. Under the old rule, people paid an initial premium of 0.5 percent of the appraised value of the home. Now it’s a 2 percent upfront premium.
Additionally, the maximum loan amount a homeowner could borrow was reduced. But another charge, an annual mortgage insurance premium, was dropped to 0.5 percent, down from 1.25 percent.
[From AARP read: New Reverse Mortgage Rules Could Mean Less Cash]
The new tax changes might not make reverse mortgages as appealing.
The reverse mortgage that’s federally backed is a Home Equity Conversion Mortgage. If you’re contemplating getting this type of loan, you’ll have to see a HUD-approved counselor. To find an agency, call (800) 569-4287 or search online by clicking this link.
Take this quiz to test your knowledge of how a reverse mortgage works. Don’t be so desperate for a stream of retirement income that you skip over important details.
I also want you to check this out, from bankrate.com: Should you get a reverse mortgage? The pros and cons
For a cautionary tale of what could go wrong with a reverse mortgage read: More seniors are taking loans against their homes — and it’s costing them
“Reverse mortgages may be a tool that is appropriate sometimes, but it should be considered a last resort,” Denbeaux says.
Have you used a reverse mortgage to get by in retirement? If so, how did it work out for you? Send your comments to email@example.com. Please include your name, city and state. Put “Reverse Mortgage” in the subject line.
Retirement rants and raves
I’m interested in your experiences or concerns about retirement or aging. What do you like about retirement? What came as a surprise?
If you haven’t retired, what concerns you financially? You can rant or rave. This space is yours. It’s a chance for you to express what’s on your mind. Send your comments to firstname.lastname@example.org. Please include your name, city and state. In the subject line put “Retirement Rants and Raves.”
In the previous retirement newsletter, I asked: Have you retired early? If so, how did you do it? Or on the flip side do such stories make you feel bad about your financial choices? Do the stories seem realistic?
Cynthia Wong of Denver wrote, “I find these stories hugely inspirational as a regular person who bought into the advice to always have a car loan, to borrow money at will to buy a home or pay for an education. I’m 56 now and thanks to people like Dave Ramsey (his 7 Baby Steps program took me out of debt) and Mr. Money Mustache (who taught me to downsize my home, live closer to work; use public transportation or walk to shop and socialize), I am debt-free and on track for a mortgage-free retirement before 62.”
Steve Kelly of Ellicott City, Md., said, “I didn’t retire very early — 59 years 11 months. I was mainly able to do that because of my old-fashioned Civil Service Retirement System pension. Also, no kids. My wife worked — small pension and Social Security. We mostly saved her salary after taxes. Maxed out IRAs until that was ended for people with retirement systems, Roth when that was eligible. and my [federal] Thrift Savings Plan (TSP), and her 403(b). Invested aggressively in stock no load mutual funds.”
But Kelly says he has some regret. “In retrospect — now that pension is assured — we saved too much and could have splurged more.”
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