What is a reverse mortgage?
A reverse mortgage is a type of loan available to seniors 62 and older who own their home. With a reverse mortgage, you can receive a lump sum of cash, monthly cash payments, or a line of credit. There is no down payment required and you don’t need to make any payments on the loan. A reverse mortgage is paid back when you pass away or move and sell your home. The proceeds from the sale of your home are used to pay off the principal of the loan you received, as well as any interest, mortgage insurance premiums, and other fees. Any excess proceeds from the sale are returned to you or to your heirs. If the value of your home decreases and no longer covers the entire cost of your loan, the lender is responsible for absorbing the loss. They cannot require you or your heirs to pay the difference. The value of your loan can also exceed the value of your home if you opt to receive monthly payments and live for a long time. How does a reverse mortgage work in 2024? To qualify for a reverse mortgage, the youngest person listed on your home’s title must be 62 years of age or older. In addition, your home must be your principal residence rather than an investment property or second home. If your home is not in good shape, your lender can tell you what repairs must be made before you can qualify for a reverse mortgage. There are also financial requirements for taking out a reverse mortgage. You must own your home outright or be able to pay off any remaining mortgage debt using funds from the reverse mortgage. You also cannot have any outstanding federal debt, such as tax debt, although you can use money from your loan to pay these off. Finally, you must have money set aside, or set aside funds from the reverse mortgage, to pay for ongoing property expenses like taxes and maintenance. Pros and cons of a reverse mortgage in 2024 Let’s take a closer look at some of the advantages and disadvantages of a reverse mortgage: Pros Cons How much does a reverse mortgage cost? A reverse mortgage does not require you to make any payments for as long as you continue to live in your home. However, these loans are not free. A reverse mortgage charges an interest rate just like a traditional mortgage. But since the loan principal increases over time (if you opt for monthly payments or a line of credit), your interest costs will rise rather than fall as time passes. This can be especially true if you opt for an adjustable-rate reverse mortgage as opposed to a fixed-rate reverse mortgage. Reverse mortgages also charge fees for insurance to protect against the possibility that your loan value exceeds the value of your home. You must pay 2% of your home’s appraised value upfront, plus an additional 0.50% of the total loan value each month. In addition, reverse mortgages charge origination fees, which are often around 3% of the value of your loan. These fees are paid back by selling your home after you move or pass away. In most cases, your heirs can also choose to pay back the loan balance or pay 95% of your home’s appraised value, whichever is less, to keep the home. How much money can you borrow with a reverse mortgage? The amount you can borrow with a reverse mortgage varies based on a variety of factors. Of course, the more your home is worth, the more you can typically borrow. You can also borrow more against the same home if you can get a lower interest rate. However, you should expect that the amount you can borrow will always be much less than the full value of your home. This is in part because fees for the loan, including insurance premiums and origination fees, are included when a lender considers the size of your loan against the value of your home. In addition, younger borrowers typically receive less money than older borrowers. That’s because younger borrowers are expected to live longer, thus leaving more time for the size of the loan to grow relative to the value of your home. Should you take out a reverse mortgage? A reverse mortgage can be a good option for seniors whose primary financial asset is their home. With a reverse mortgage, you can continue to live in your home and access its equity to receive a lump sum of cash or monthly payments to supplement your retirement income. For a reverse mortgage to be worthwhile, you should plan to live in your home for a long time. You must also be able to pay all ongoing expenses, including property taxes, insurance premiums, and maintenance costs. Reverse mortgages are complex financial products with a range of potential benefits and risks. It’s extremely important to understand the terms of a reverse mortgage before committing to it. Consider speaking with a financial advisor or attorney when deciding whether a reverse mortgage is right for you.
How Retirees Can Downsize In Today’s Housing Market
Rising prices, higher interest rates and a tight supply of smaller homes present challenges. But retirees have an edge If you spent your teenage years waiting anxiously for one of your siblings to get out of the shower, the idea of selling your spacious, multi-bathroom home and moving into a smaller house or condo may feel like a reversal of fortune. Yet for many retirees, downsizing makes financial and practical sense. Younger baby boomers — those currently ranging in age from 57 to 66 — made up 17% of recent home buyers, while older boomers — ages 67 to 75 — accounted for 12%, according to a 2022 report from the National Association of Realtors Research Group. Boomers’ primary reasons for buying a home were to be closer to friends and family, as well as a desire to move into a smaller home, the report said. Both younger and older boomers were more likely than others to purchase a home in a small town, and younger boomers were the most likely to buy in a rural area. Not all retirees move into a smaller home. A survey by Age Wave and Merrill Lynch found that about one-third of retirees opted to “upsize” to a larger home. But a smaller house or condo typically requires less maintenance and may be more accessible than a two-story suburban house. And at a time when homeowners age 62 and older have more than $12 trillion in home equity, down-sizing offers a way to free up some of that equity for other purposes, such as shoring up retirement accounts or saving for long-term care. FREE ISSUE Save up to 74% on Kiplinger Personal Finance Become a smarter, better informed investor. Subscribe to save up to 74%, plus get up to 4 Special Issues. For retirees Fred and Shelby Bivins, selling their home in Green Valley, Ariz., will enable them to realize their dream of traveling in retirement. The Bivinses have put their 2,050-square-foot Arizona home on the market and plan to relocate to their 1,600-square-foot summer condo in Fish Creek, Wis., a small community about 50 miles from Green Bay. They plan to live in Wisconsin in the spring and summer and spend the winter months in a short-term rental in Arizona, where they have family. Fred, 65, says the decision to downsize was precipitated by a two-month stay in Portugal last year, one of several countries they hope to visit while they’re still healthy enough to travel. “We’ve had Australia and New Zealand on our list for many years, even when we were working,” says Shelby, 68. The Bivinses are also considering a return visit to Portugal. Eliminating the cost of maintaining their Arizona home will free up funds for those trips. With help from Chris Troseth, a certified financial planner based in Plano, Texas, the Bivinses plan to invest the proceeds from the sale of their home in a low-risk portfolio. Once they’re done traveling and are ready to settle down, they intend to use that money to buy a smaller home in Arizona. “Selling their primary home will generate significant funds that can be reinvested to support their lifestyle now and in the future,” Troseth says. “Downsizing for this couple will be a positive on all fronts. Challenges for downsizers For all of its appeal, downsizing in today’s market is more complicated than it was in the past. With 30-year fixed interest rates on mortgages recently approaching 8%, many younger homeowners who might otherwise upgrade to a larger home are unwilling to sell, particularly if it means giving up a mortgage with a fixed rate of 3% or less. More than 80% of consumers surveyed in September by housing finance giant Fannie Mae said they believe this is a bad time to buy a home and cited mortgage rates as the top reason for their pessimism. “This indicates to us that many homeowners are probably not eager to give up their ‘locked-in’ lower mortgage rates anytime soon,” Fannie Mae said in a statement. As a result, buyers are competing for limited stock of smaller homes, says Hannah Jones, senior economic research analyst for Realtor.com. Here, though, many retirees have an advantage, Jones says. Rising rates have priced many younger buyers out of the market and made it more difficult for others to obtain approval for a loan. That’s not an issue for retirees who can use proceeds from the sale of their primary home to make an all-cash offer, which is often more attractive to sellers. Retirees also have the ability to cast a wider net than younger buyers, whose choice of homes is often dictated by their jobs or a desire to live in a well-rated school district. While the U.S. median home price has soared more than 40% since the beginning of the pandemic, prices have risen more slowly in parts of the Northeast and Midwest, Jones says. “We have seen the popularity of Midwest markets grow over the last few months because out of all of the regions, the Midwest tends to be the most affordable,” she says. “You can still find affordable homes in areas that offer a lot of amenities.” Meanwhile, selling your home may be somewhat more challenging than it was during the height of the pandemic, when potential buyers made offers on homes that weren’t even on the market. The Mortgage Bankers Association reported in October that mortgage purchase applications slowed to the lowest level since 1995, as the rapid rise in mortgage rates has pushed many potential buyers out of the market. Sales of previously owned single-family homes fell a seasonably adjusted 2% in September from August and were down 15.4% from a year earlier, according to the National Association of Realtors. “As has been the case throughout this year, limited inventory and low housing affordability continue to hamper home sales,” NAR chief economist Lawrence Yun said in a statement. However, because of tight inventories, there’s still demand for homes of all sizes, Jones says, so if your home is well maintained and move-in ready, you shouldn’t have difficulty selling
How to get equity out of your house — without harming your finances
Due to rising home values, the average homeowner gained an additional $20,000 in home equity between the third quarters of 2022 and 2023, according to data analytics firm CoreLogic. Borrowing against your home equity can be more cost-effective than other forms of borrowing, like credit cards or personal loans. The most common ways to tap your home equity include home equity loans, home equity lines of credit (HELOCs), cash-out refinance mortgages and reverse mortgages. The best choice for you will depend on factors like how you plan to use the funds, market conditions and your long-term goals. To understand how to get equity out of your house, we’ll explore your options and walk you through how to apply. 4 ways to tap your home equity. To convert your home’s equity into cash, consider one of the four following options: Home equity loan Best for: Borrowing a lump sum without changing your current mortgage. A home equity loan, also known as a second mortgage, is an installment loan secured by your property. Your first mortgage is unaffected, and the home equity loan takes a secondary lien position. This means that if you default on your loans and your home is sold to repay your debt, your primary mortgage will be repaid first, and the secondary lien will be repaid next. Home equity loans have fixed interest rates — which means predictable monthly payments — and funds are provided in a lump sum. Lenders commonly offer repayment terms between five and 30 years. How much you can borrow will depend on the amount of equity you have. Most lenders allow you to borrow up to 80% of your home’s equity, though some may allow up to 90%. To understand how to calculate your equity, continue reading below. You’ll usually have to pay for an appraisal to qualify, and you’ll incur high upfront closing costs — often between 2% and 6% of your home’s value. As with any form of borrowing secured by your home, you run the risk of foreclosure if you can’t repay the debt. Pros Cons Fixed interest rates mean payments won’t change Rates are typically lower than other forms of borrowing, like credit cards or personal loans Your first mortgage won’t be affected Total borrowing costs are known upfront. Closing costs are high You must know how much money you’ll need upfront An appraisal is likely needed You’ll have a second monthly mortgage payment Risk of foreclosure Home equity line of credit (HELOC) Best for: Borrowing a variable amount. A home equity line of credit, or HELOC, is a form of revolving debt that works like a credit card. During the draw period, which typically lasts 10 or 15 years, you spend funds as needed, up to your preset limit. Your monthly dues are typically interest-only payments, and you only repay what you’ve borrowed. When the draw period ends, you’ll repay your principal balance plus interest over a set term, usually spanning 15 to 20 years. As with a home equity loan, your primary mortgage is unchanged when you borrow a HELOC. You can typically borrow up to 80% of the equity in your home (when combined with any other mortgages), though you may find lenders willing to let you borrow up to 90%. HELOCs come with variable interest rates and often don’t have as many large upfront costs as home equity loans — for instance, you’re unlikely to need title insurance. A home appraisal will be necessary, and the lender will often charge administrative fees. Depending on the details of your line of credit, closing costs may be as much as those on a home equity loan: 2% to 6% of your loan amount. “HELOCs generally have low to no closing costs and — given their variable nature — you’re able to benefit when rates start to come down without the need to refinance,” said Matthew Sanford, mortgage lending executive at Skyla Federal Credit Union. Pros Cons Borrow funds as needed Repay only what you borrow, rather than the full amount Interest-only payments during the draw period Variable rate could decline with the market. Variable rate means your borrowing costs could go up over time, making monthly dues unpredictable An appraisal is likely needed You won’t know the overall cost upfront You’ll have a second monthly mortgage payment Risk of foreclosure. Cash-out refinance Best for: Tapping equity and refinancing your current mortgage. A cash-out refinance replaces your existing mortgage with a new loan for a larger amount. You’ll then repay your current loan with the proceeds from the cash-out refinance loan and keep the extra money for other uses. You can generally borrow up to 80% of what your home is worth and pay back your debt over 15 to 30 years. Since you’re modifying your original loan, a cash-out refinance could be more expensive if your existing rate is lower than the rate on your new refinance loan. This may be the case if you borrowed in recent years when rates were near record lows. However, if your credit has significantly improved since you borrowed your home loan, you may qualify for a lower rate. You’ll have a choice of a fixed or variable rate with a cash-out refinance loan. While interest rates are typically lower on cash-out refinance loans than, say, a credit card or personal loan, you’ll pay more in interest than you would if you weren’t cashing out equity. And closing costs are often high, typically between 2% and 6% of the loan amount. If you itemize deductions on your taxes, you can deduct mortgage interest on loans up to $750,000. Interest may be deductible on home equity loans or lines of credit only if the funds are used to buy, build or substantially improve the property guaranteeing the loan. This restriction doesn’t apply to a cash-out refinance loan. Pros Cons Use the cash for any purpose without forfeiting tax benefits Fixed and variable rate options You may be able to lower your current mortgage rate Only one monthly payment to manage
Reverse Mortgages: A Potential Solution for Long-Term Care in Retirement?
In the face of growing need for long-term care (LTC) amid an ageing U.S. population, personal finance publication Kiplinger has spotlighted the potential of reverse mortgages as a viable solution. With the middle class finding affordable insurance options for LTC increasingly limited, reverse mortgages, particularly Home Equity Conversion Mortgages (HECMs), could provide an additional source of income and liquidity. This could extend the financial viability of retirement plans by covering LTC premiums and other expenses. Reverse Mortgages: A Potential Panacea? The essence of a reverse mortgage lies in its capacity to convert a portion of home equity into cash, without requiring any monthly mortgage payments. Specifically, the HECM, a federally insured reverse mortgage, presents itself as a potentially beneficial tool in retirement planning. It provides retirees with additional income, enhancing their financial stability and ability to cover necessary LTC premiums and other expenses. Industry Recognizes Potential Recognizing the potential of LTC to raise awareness about the benefits of reverse mortgages, industry professionals have begun pursuing LTC certifications. These certifications equip them to better advise their clients on retirement options and government benefits programs. Notably, programs such as Medicaid often cover LTC in nursing homes, providing retirees with critical support. Aging Population and The LTC Challenge The challenge of planning for LTC in retirement is exacerbated by the aging U.S. population. The need for LTC is expected to escalate, putting additional financial pressure on retirees. The prospect of using reverse mortgages to bridge this financial gap is becoming increasingly attractive to industry professionals and retirees alike, creating a potentially transformative shift in retirement planning. By Muthana Al-Najjar Published: January 9, 2024
Downsizing with a reverse mortgage
After securing historically low mortgage rates just a few years ago, many homeowners are now feeling like they’re stuck in their homes. They don’t want to give up that low rate and take their chances in today’s housing landscape where property values and interest rates are elevated, even if their current home no longer suits their evolving needs and physical requirements. However, homeowners aged 62 and older (55 years old in some states) can leverage their increased equity into retirement funds by selling their home in this competitive market and using the proceeds to purchase another home with a reverse mortgage. Senior homeowners have various reasons to downsize. Perhaps their current home is too large to maintain, keeping up with the yard work is becoming a burden, or they’re no longer comfortable climbing the stairs. Motivations to relocate may be financial or familial as well. A reverse mortgage can free up room in the budget, create an ongoing stream of consistent income, establish a reserve fund for the unexpected, and facilitate a move closer to family. Homeowners considering a reverse mortgage should contact a mortgage professional to discuss the benefits, process and details of the program. They can research the value of the property and calculate how much equity can be accessed. Next, they can weigh their options and decide how best to utilize the funds. The proceeds can be taken as a one-time lump sum, or set aside as a source of monthly income, a line of credit or a combination thereof. Purchasing a home with a reverse mortgage also allows seniors to retain significantly more money than buying one outright with cash. While paying cash for a home eliminates a mortgage payment, those funds are then tied up in the property instead of being readily available and not subject to constantly changing market conditions. Say a homeowner nets $325,000 from selling their home, and they find a new downsized home that’s listed for $300,000. If they pay full price in cash, they’d only be left with $25,000 in the bank. By using a reverse mortgage and a large down payment instead, the built-in equity becomes an instant retirement fund with a substantially higher available balance. Of course, there are misconceptions about reverse mortgages. Some believe they’re designed to take advantage of senior homeowners. In actuality, the Home Equity Conversion Mortgage program is regulated by the Federal Housing Authority and is structured with the express purpose of allowing seniors to age in place in their own homes while maintaining financial independence. Homeowner education and counseling are part of the process. Reverse mortgages provide financial freedom and flexibility for senior homeowners. Whether they want to stay in their current home and turn their equity into income or move into a new home that complements their retired lifestyle while providing financial security, seniors who’d like to explore their options should contact a mortgage professional and invite their family to join the discussion about how a reverse mortgage could work for them. Chad Moore December 23, 2023
3 ways seniors should tap into their home equity, according to experts.
Home equity products have been a popular method of financing in recent years, largely thanks to housing market conditions and high interest rates. For one, home prices have been on the rise for some time, leaving many homeowners with serious equity to tap. In addition, interest rates on credit cards have skyrocketed (with the average rate now above 21%). Since home equity products typically have much lower rates comparatively — home equity loans have rates that currently average between 8% to 10% — they make for a much more affordable financing option. Seniors, in particular, can see big benefits from tapping their home equity these days. Not only can it supplement retirement income, but it can be used for any purpose — making your house more accessible, paying off debts or even helping your grandkids through college. Learn more about today’s top home equity loan options here. 3 ways seniors should tap into their home equity, according to experts There are many ways to tap your home equity. Are you a senior considering using your equity to your advantage? Here are the best ways to do it, according to financial pros. Reverse mortgage One of the best ways for seniors to tap their home equity, experts say, is through a reverse mortgage — also called a Home Equity Conversion Mortgage. With these loans, seniors won’t make monthly payments, but instead get paid — out of their home equity — by their lender. These payments can be made monthly or as one lump sum. You can also opt for a line of credit that can be used as needed. “The homeowner stays in the home and they no longer have a mortgage payment,” says Rose Krieger, a senior home loan specialist at Churchill Mortgage. “This frees up funds for them to do the things they need and want as they enter their golden years.” Reverse mortgages accrue interest just like any other loan, but that interest — and the balance you borrow — won’t be due until you sell the house, permanently move away or pass on. “The biggest con to a reverse is that someday when you pass, your heirs will have a larger loan on your home to deal with,” says Aaron Gordon, branch manager at Guild Mortgage. “They’ll have a year to figure out if they want to sell, refinance, or pay it off.” Find out the top home equity loan rates you could qualify for here. Home equity loans and HELOCs Home equity loans — a type of second mortgage — are another way seniors can borrow from their home equity. These loans offer a lump sum payment after closing and come with regular monthly payments from the start of the loan (making them best for seniors with a healthy amount of reliable income.) Home equity lines of credit, or HELOCs, are also a smart option for seniors, too, experts say. These turn your equity into a credit line that you can withdraw money from, typically for 10 years. “It’s a revolving line of credit, meaning you take funds out, make payments on it and then funds are again available to use,” Krieger says. “It functions like a credit card, but the collateral is your home.” HELOCs can be helpful if you’re not sure how much you’ll need or you want access to money over a long period of time — maybe to fund home accessibility renovations, for instance. They also typically require interest-only payments for the first decade of the loan, which can reduce financial stress if you’re on a fixed income. Home equity investments Seniors can also consider home equity investments, which let you sell a portion of your home’s future value in exchange for a lump sum of money. There are no monthly payments, and you only pay the investor once you sell the home or reach the end of your term (which can be anywhere from 10 to 30 years). “Homeowners continue to live in their home as usual,” says Michael Micheletti, communications officer at home equity investor Unlock. “They maintain full control over it.” Many companies offer home equity investments these days, including Unlock, Unison, Point, Hometap and Splitero. One option to avoid: Cash-out refinancing Though a cash-out refinance is certainly an option for accessing your home equity, experts don’t advise it in this market. Since refinancing requires replacing your main mortgage with a loan that has new terms and a new rate, doing so now would result in a significant interest rate increase for most homeowners. “What is their current interest rate?” Krieger asks. “Will the new rate of a cash-out be higher than their current rate? This could mean that their new mortgage payment will be higher than their current payment.” According to real estate brokerage Redfin, nearly 92% of homeowners have a current mortgage rate under 6%. For seniors in this group, refinancing would mean getting a new loan at today’s rates, which average just over 7%. “Cash-out refinances were popular a couple of years ago when interest rates were very low, but with today’s rates, are generally not the best option,” Micheletti says. The bottom line Whatever type of home equity product a senior chooses, shopping around is an essential component of getting the best rate. Get quotes from at least a few companies and compare each on rates, fees, terms and other details. If a rate you’re quoted seems too high, consider improving your credit score and reapplying later on. Typically, borrowers with higher credit scores get the best rates. BY ALY YALE DECEMBER 21, 2023 / 12:04 PM EST / CBS NEWS
Reverse mortgage in action – a flexible financial tool to help retirees.
It may be time to put the solution in front of your clients… A reverse mortgage is a flexible financial tool that can give seniors access to more money at a lower cost than other borrowing options. It can also help a senior to stay in their home longer, which can have financial, emotional, and lifestyle benefits for them and their family. Meet Mary Mary lives in a house in Hamilton, ON, built in the 1970s. It’s on a large lot and is probably worth about $1 million. She’s a healthy 80-year-old widow with a modest survivor pension from her late husband, as well as government pensions and moderate savings. She has about $50,000 of credit card debt that has accelerated since her husband’s passing and only about $10,000 of remaining room relative to her limits. They carried a small balance previously, but with a 33% reduction in his company pension and the loss of his government pension income, it’s tough for Mary to cover her fixed expenses. Financial options Mary’s son took her to the bank to get a line of credit. The bank was only willing to offer her a $10,000 unsecured line of credit. They said if she got a secured line of credit backed by her home equity, they could only provide a limit of $100,000 based on her income. Both of these options could help reduce her interest costs in the short term and provide some additional funds in the medium term but may not be her best long-term solution. Mary needs about $1,500 per month beyond her pensions, or about $18,000 per year. If she proceeds with the bank’s offer of a $10,000 unsecured line of credit and $100,000 secured line of credit, she will have $110,000 at her disposal. With it, she could pay off her credit card debt and have $60,000 of additional funds available. This might only last her for three years, before she’s back to using her credit cards. The bank also said she may need to close a couple of her credit cards to get approval for the lines of credit. Another option for Mary is to sell her house and move into a condo. This has its benefits, as Mary is social, but the condos in her neighborhood are primarily new and tend to be lived in by young families. Another feature of these condos is relatively high fees for amenities that Mary will not likely use, like a gym, a pool, and underground parking. Mary doesn’t drive anymore and can walk pretty much anywhere she needs from her house. Despite Mary’s home being older, it’s been well maintained. She’s hesitant to spend much on the house, as the next buyer will likely renovate to modernize. As a result, her home maintenance costs are modest. If Mary bought a condo nearby, after transaction costs, she may not net much money to pay off her debt and add to her bank account. Her monthly costs could also be higher, and she would need help from family to drive to do errands. Although Mary could sell her house and move into a retirement home, she values her independence. She’s still mourning the loss of her husband and selling the house would feel like another loss. The way Mary sees it, if she sells her house and spends the proceeds on rent, that reduces her estate value. If she stays in her home and borrows against it, that also reduces her estate value. More importantly, she and her husband worked hard to build their wealth and have helped their kids and grandkids plenty over the years, so maximizing their inheritance is not a priority. Even though home prices in her neighborhood have appreciated, keeping her home may well end up a better investment than selling it and investing the proceeds. The reverse mortgage solution As an alternative, Mary could consider a reverse mortgage, which could allow her to borrow about half her home equity or around $500,000. The interest rate may not be that much different than those for the two lines of credit offered by the bank. Like a line of credit, a reverse mortgage can be flexible. Payment options include a lump sum advance all at once, regularly scheduled payments like a pension which can be deposited to her bank account, or on a per-need basis over time. Here’s the comparative math and summary for the borrowing options presented to Mary: The line of credit interest rates are variable rates that fluctuate with the prime lending rate. A reverse mortgage has convenient variable or fixed rate options available. A traditional mortgage loan rate tends to be lower than a secured line of credit rate by 1.0 – 1.5%. Seniors most often end up using lines of credit if they need to borrow monthly, with rates more comparable to a reverse mortgage*. Either a line of credit or a reverse mortgage could be better than a credit card for a senior who needs to borrow to supplement their spending. A reverse mortgage may allow a senior to borrow more money than they could otherwise through traditional borrowing, and a lump sum payment from a reverse mortgage can be used to pay off other high interest rate debt or used for a one-time cost like a renovation. Some seniors also set up a recurring monthly advance into their bank account that is like a pension, but tax-free. This allows them to continue to qualify for means-tested benefits, like the Guaranteed Income Supplement, or Goods and Services Tax/Harmonized Sales Tax (GST/HST) credit, and the amount they’re eligible for based on age for Canadian pension plan (CPP) and old age security (OAS). A reverse mortgage may not be right for everyone, but it can be a great option for many. So before downsizing, renting, or moving into a retirement home, seniors and their families should consider the flexibility of a reverse mortgage as a financial tool to help them stay in their
How a Reverse Mortgage Works? Benefits and Drawbacks
In today’s financial landscape, more and more retirees are turning to reverse mortgages as a means to access their home equity and secure their financial future. A reverse mortgage is a unique financing option that allows homeowners aged 62 and older to convert a portion of their home equity into tax-free cash. In this article, we will dive deeper into how a reverse mortgage works, its benefits and drawbacks, and how to determine if it is the right financial solution for you. How a Reverse Mortgage Works A reverse mortgage is a type of loan that allows homeowners over the age of 62 to convert a portion of their home equity into cash without having to sell their home or make monthly mortgage payments. The loan proceeds can be received in a lump sum, a line of credit, or monthly payments, and can be used for any purpose. The amount of money a homeowner can receive from a reverse mortgage depends on several factors, including the value of the home, the age of the homeowner, and the interest rate. Homeowners who have more equity in their homes typically qualify for larger loan amounts. Unlike traditional mortgages, where the borrower makes monthly payments to the lender, with a reverse mortgage, the lender makes payments to the borrower. Interest on the loan is added to the balance over time, which means the balance of the loan grows larger over time. A reverse mortgage does not need to be repaid until the homeowner no longer lives in the home, either because they have passed away, sold the home, or moved out permanently. At that point, the loan balance is paid back to the lender, typically through the sale of the home. If the sale of the home does not cover the entire balance of the loan, the lender may seek repayment from other assets of the estate. Understanding the Mechanics of a Reverse Mortgage To qualify for a reverse mortgage, you must meet certain criteria. The first requirement is that you must be at least 62 years old. Additionally, you must be a homeowner with substantial equity in your property. Lenders typically look for a significant amount of home equity to ensure that the loan can be repaid when the borrower is no longer living in the home. Your credit score and income are not primary factors, as reverse mortgages are based on the value of your home, not your financial circumstances. Types of Reverse Mortgages There are several types of reverse mortgages available, each serving different purposes and meeting varying needs. The most common type is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA). HECM loans offer flexible options, such as a line of credit, lump sum, or monthly payments. Another option is a proprietary reverse mortgage, offered by private lenders, which may provide higher loan amounts for homeowners with higher-valued properties. Loan Amounts and Interest Rates The amount of money you can receive through a reverse mortgage depends on several factors, including your age, the value of your home, and current interest rates. Generally, the older you are and the more valuable your home, the more cash you can access. Interest rates for reverse mortgages vary and are typically higher than those of traditional mortgages. However, the interest compounds over time rather than being paid monthly. Repayment Options: What Happens When the Loan Comes Due? One of the unique features of a reverse mortgage is that you don’t need to make monthly payments during the term of the loan. You are only required to repay the loan when you no longer use the home as your primary residence. Repayment can occur when you sell the property, move to a different home, or pass away. In these cases, either you or your heirs will need to repay the loan through the sale of the property or refinancing. Advantages and Disadvantages of a Reverse Mortgage Before considering a reverse mortgage, it’s important to weigh the advantages and disadvantages. One significant advantage is that a reverse mortgage provides access to funds without the need for monthly repayments, allowing you to enhance your retirement income. Additionally, the funds received from a reverse mortgage are usually not subject to income tax. However, there are also drawbacks to consider, such as potential high fees associated with reverse mortgages, the impact on your home equity, and potential limitations on passing the home to your heirs. Common Misconceptions: Separating Fact from Fiction There are several misconceptions surrounding reverse mortgages that can deter homeowners from exploring this financial option. Let’s address a few of these misconceptions: Myth 1: The bank owns your home with a reverse mortgage. Fact: With a reverse mortgage, you retain ownership and stay on the title of your home as long as it remains your primary residence. Myth 2: Only low-income individuals need reverse mortgages. Fact: Reverse mortgages are suitable for homeowners across different income brackets. The funds can be used to supplement retirement income, pay off existing debt, or cover unexpected expenses. Myth 3: The home must be mortgage-free to be eligible for a reverse mortgage. Fact: While it is advantageous to have little to no existing mortgage, it is not a requirement to be eligible for a reverse mortgage. Existing mortgages can be paid off with the proceeds from the reverse mortgage. Determining If a Reverse Mortgage Is Right for You To ascertain whether a reverse mortgage is a suitable financial solution for you, consider the following: Applying for a Reverse Mortgage: The Process Demystified Applying for a reverse mortgage involves several steps, including gathering the necessary documents, choosing a reputable lender, and navigating the application process. Here’s an overview of what to expect: FAQs Q: Do I need to have no mortgage on my home to qualify for a reverse mortgage? A: No, but any existing mortgage on the home must be paid off with the proceeds from the reverse mortgage. Q: Can I still leave my home to my heirs? A:
Don’t be fooled by ‘cooling’ inflation.
The pace of inflation has slowed but prices remain high. The next time someone tells you inflation’s coming down? Ask, from what?! Sure, inflation has tapered since its 9.1% peak in June 2022, but Americans are still grappling with significantly higher prices of goods and services. Even with modest pay hikes, workers are finding it tough to keep up with inflation’s pace. It’s no wonder—overall inflation stands 13% higher than in April 2021. Retirees relying on fixed incomes are feeling the pinch, left with little choice but to cut back on essentials or seek extra income sources. Consider this: an average single retired worker getting $1,847 monthly will only see a $59 bump in 2024, not factoring in the $9.80 increase in Medicare Part B premiums according to the Social Security Administration. This is prompting older homeowners to ponder how long their savings can weather inflation’s impact. Reverse mortgage professionals would be remiss not to address the real-life consequences of soaring prices with potential borrowers. Eroding the value of the dollar Recent reports, like Bloomberg’s, indicate it now takes $119.27 to buy what cost much less in early 2020—a 19% hike in daily expenses. CNBC’s analysis of Labor Statistics data from April echoes this trend, highlighting how everyday items are significantly pricier compared to just two years ago. It’s not just the year-over-year inflation pace; it’s the current cost that truly matters. Despite expectations of some prices like homes and vehicles cooling off, most goods and services are unlikely to revert to pre-pandemic rates. In fact, most will become the new benchmark. Though inflation’s pace has slowed, its impact on wallets remains substantial. Between April 2021 and 2023, overall prices soared by 13%. The prices tell the story The grocery store bill tells a compelling story—food costs have surged by 25% since January 2020.Housing expenses have shot up due to surging home prices and mortgage rates. Average monthly mortgages have spiked by 40-60%, and rent for single or multi-family units surged by 28% since 2020, according to Zillow’s Rent Index. Utilities, too, have become more expensive. Residential electricity bills in California surged by a staggering 51% from August 2019 to August 2023. Stopping by your local fast food restaurant has become much more expensive—fast food prices have shot up significantly. Burgers cost 23% more, pizzas 17% more, and chicken dishes take 32% more from your wallet. While many working Americans live paycheck to paycheck, seniors understand the value of saving. But inflation is chipping away at their nest eggs, a concerning trend as savings rates mirror the lows before the 2008 Financial Crisis. Conclusion In conclusion, discussing inflation is crucial for potential reverse mortgage borrowers. It’s the undeniable elephant in the room that demands attention. by Shannon Hicks November 28, 2023
5 Tips on How to Make Your Money Last During Retirement
With 10,000 individuals in the United States reaching the age of 65 daily and entering retirement, the prospect of overseeing our finances for a prolonged period can seem overwhelming. The retirement phase, often spanning several decades, requires meticulous financial planning and strategy. The unpredictability of life expectancy and unforeseen expenses make financial planning during retirement particularly crucial. In this post, we’ll go over five effective strategies to help retirees ensure their savings last through their retirement years, promoting a serene and financially secure lifestyle. Exploring Home Equity Solutions like Reverse Mortgages One of the most significant assets many retirees have is their home. Tapping into this asset through a reverse mortgage can provide a steady stream of income, while still allowing retirees to live in their home. Homeowners 62 years and older can utilize a reverse mortgage, a loan type that converts a portion of their home equity into accessible cash. This option is especially advantageous for those with significant home equity but limited liquid assets. Should this appear to be the right choice for you, the initial step involves selecting a trustworthy lender and applying for the loan. For instance, you can apply for a reverse mortgage through Home for Life Reverse Mortgage, Inc. to work with a team of experts ready to guide you through the process. They can demystify the terms and conditions, making them easily comprehensible. Nonetheless, it’s important to remember that a reverse mortgage, while offering financial respite, also entails accruing a debt that must be repaid in specific situations, such as when the homeowner relocates or passes away. Therefore, it’s crucial for retirees to thoroughly understand the terms and consult with financial advisors to determine if this option aligns with their overall retirement plan. Creating a Budget Tailored to Retirement Budgeting during retirement is crucial. Unlike the pre-retirement phase where income is generally predictable and increasing, retirement income is usually fixed and requires careful management. Adjusting spending habits to align with this new income reality is essential. Retirees should prioritize essential expenses, such as healthcare, housing, and food, while seeking ways to reduce discretionary spending. Additionally, utilizing tools and resources for expense tracking can provide a clear overview of spending habits, facilitating the identification of areas where costs can be reduced. This proactive approach to budgeting ensures that retirees can enjoy their retirement without the constant worry of financial strain. Investing Wisely for Long-Term Growth Maintaining an investment portfolio during retirement is another key strategy for making money last. The right investments can provide a balance of income and growth, helping to combat inflation and preserve capital. However, the approach to investing during retirement should be different from the more aggressive strategies employed during the earning years. For sustained financial health during retirement, it’s advisable to gravitate towards lower-risk investments. However, maintaining a certain level of involvement in growth-driven assets is equally critical. Seeking guidance from a financial advisor can offer personalized recommendations, considering factors like risk tolerance, financial objectives, and the retiree’s unique circumstances. Reducing Unnecessary Expenses Retirees can also extend the longevity of their retirement funds by minimizing unnecessary expenses. This doesn’t necessarily mean living frugally, but rather being mindful about spending. For instance, downsizing to a smaller home can reduce maintenance costs and property taxes, while taking advantage of senior discounts and negotiating better rates on utilities and services can lead to significant savings. Adopting a minimalist lifestyle, where one focuses on the essentials and finds joy in simplicity, can also contribute to financial sustainability. By reducing the urge to spend on non-essentials, retirees can ensure that their funds are reserved for truly important and fulfilling experiences. Incorporating sustainable sources like recycling and reusing items can also reduce costs. Additionally, regular financial reviews to identify and eliminate unnecessary subscriptions or memberships can further enhance savings. Exploring Additional Income Streams Finally, considering additional income streams can be a game-changer. Part-time work, freelancing, or turning a hobby into a small business are all viable options for retirees. Not only do these avenues provide financial benefits, but they also offer mental and social stimulation, keeping retirees engaged and active. Retirees often possess a wealth of knowledge and experience that can be monetized. Whether it’s consulting, tutoring, or crafting, there are numerous ways to turn skills and passions into a source of income. This approach not only bolsters financial resources but also adds a sense of purpose and fulfillment to the retirement years. Final Thoughts Retirement should be a time of relaxation and enjoyment, not financial stress. By considering options like reverse mortgages, creating a retirement-tailored budget, investing wisely, cutting unnecessary expenses, and exploring additional income streams, retirees can make their money last. With these strategies in place, the golden years can truly be a time of comfort, security, and happiness. By The West News November 27, 2023