The time horizon for an average retiree has increased significantly. Because of this, planning for a 30-35 year retirement is no longer out of the question. To help you plan for this extended timeframe, there are several tools that can help — and a reverse mortgage is one of them.
In one of our latest episodes of Retirement Revealed with Jeremy Keil, we had the opportunity to speak with Steve Kalscheur, a Reverse Mortgage specialist with the American Advisors Group. Steve provided a ton of useful information about how reverse mortgages work and the various benefits they have to offer.
All that Steve asks is that you keep an open mind and take the time to fully explore this option. After all, it may be exactly what you need right now!
Read on to learn five key ways reverse mortgages can help your retirement!
You Get The Money Tax-Free
A reverse mortgage is a type of retirement mortgage, where people can receive money from a mortgage rather than make payments. Reverse mortgages are often referred to as Home Equity Conversion Mortgages (HECM), and are highly regulated, safe products used by well over a million people.
With a reverse mortgage, can get payments tax-free and can take them:
Monthly, like an annuity
As an open line of credit that can be used as needed
As a lump sum
It’s also possible to mix and match all of these options to fit your needs.
You Can’t Owe More Than Your House Is Worth.
When you purchase a reverse mortgage, the entire loan balance is due when the borrower has passed away or moved out of the house. And one important thing that many people are unaware of is that the maximum you can owe on the home at that time is whatever the value of the home is, not the balance of your mortgage.
For example, if someone outlives their life expectancy and uses the reverse mortgage for 30-35 years, then they may owe more than the value of the home if the home has not kept up with the growth on what they have used. In such a scenario, the estate will owe only up to the value of the home, and not the entire balance. Hence, a reverse mortgage is called a non-recourse loan, and can be a great protection for the other assets earmarked for the family in the estate plan.
Your Available Borrowing Amount Can Grow
The line of credit associated with the Home Equity Conversion Mortgage (HECM) varies greatly from the Home Equity Line of Credit (HELOC). According to Steve, it is more of a retirement line of credit, and is perhaps the most powerful, flexible option available.
One of the great things about this line of credit is that it has a growth feature, which is currently around 4%. If someone, for example, has a $100,000 HECM line of credit, and if they don’t touch it, then the actual amount available to borrow will grow by 4%. This means that after a year, the $100,000 starting point would rise up to $104,000 in terms of the value of the line of credit.
This provides a lot of flexibility, as you can convert the available amount into an income stream or even take it out as a lump sum as and when the need arises.
You Can Hedge Against Market Downturns
This line of credit can also be a great supporting tool to hedge against a downturn in the market. How? Instead of taking money out of the market when its down, you can turn on the available line of credit income to replace the payments you were originally taking out from your investments.
Then, when the market recovers, you can simply turn it off and pay it back. Although you do not necessarily need to pay it back, doing so can allow you to use it in the future when needed.
You Can Help Pay For Other Retirement Costs
One of the main advantages of having a reverse mortgage is that you can get the money tax-free, unlike the money in your IRAs. This money will also not affect your Social Security taxation, Medicare premiums, or overall tax situation.
Another major advantage is that if you have enough equity, you can simply pay off and eliminate your existing mortgage. For some people, their mortgage might be their biggest payment every month, and eliminating that can be a huge benefit every month. By paying it off, your monthly cash flow will also significantly improve, which will ultimately help alleviate the depletion of your other securities.
Some other payments that reverse mortgages can help you manage include medications, healthcare costs, and long-term care costs.
Furthermore, most people want to age in place. However, this can require retrofitting the house to ensure that the required home care services are in place. It can also involve hefty payments for various types of additional services like walk-in bathtubs. But reverse mortgages can help you cope with those payments.
Statistics show that those who get the long term care they need at home tend to have 25% fewer doctor visits, and that the quality of life for seniors can be much higher for those who age in place.
Reverse mortgages can provide a lot of flexibility. They are a great way to monetize the vast amount of wealth that can be tied up in your home and can assist in other retirement-related expenses.
Know What You’re Getting Into
Government-insured reverse mortgages require third-party counseling before you can even take out an application. Such a session can take up to an hour or two, and the purpose of these sessions is to make sure that you completely understand the product and know what you are getting into.
After completing such a session, you get a certificate that lets you get your reverse mortgage. Such third-party counselling can really empower you and make the entire process for you much more comfortable, where you are able to make better, informed decisions.
Because of this counselling session there are usually very few instances where people may have misunderstood the product and suffered because of it. One of the biggest things people forget is that they are required to maintain the contract. This involves living in the home, maintaining it, and paying taxes and insurance payments on the home. This holds true for any mortgage loan. Failing to comply with these terms could lead to foreclosures and we do not want that to happen for anyone.
Another common thing that we see is how people dismiss this option solely on the basis of the “preconceived notions” that they have. They may have heard of some bad situations from before the Great Financial Recession in 2008-’09, but thankfully a lot of things have changed and a lot of those issues can be mitigated by paying close attention in your counselling session and working with a reputable expert.
This is why we are highly committed to educating our audience members so that they can make the right choices. We encourage everyone to take the time in exploring all the options and doing your research before getting into anything, and always consulting a professional financial advisor. To learn how you can find the right advisor to assist you, you can check out one of our latest blogs: The Different Types of Financial Advisors.
If you have more questions, feel free to contact us, we will be more than happy to assist you! To get in touch with our guest and reverse mortgage specialist, Steve Kalscheur, check out the American Advisors Group website.