Integrating Housing Wealth into a Successful Retirement Plan
By: Bob Muni, Reverse Mortgage Specialist
What would you think of a financial product that offered:
GUARANTEED GROWTH: tax-free funds guaranteed to grow at about 5% a year compounding annually that does not affect SSI, Medicare, Medicaid, etc.; unaffected by Stock, Bond, Real Estate or any market declines; which can’t be frozen, cancelled or reduced; can be accessed any time in the future; and can be converted to monthly income guaranteed for life or a period of years. (Don Graves, RICP)
A reverse mortgage is that product! It provides access to the wealth in your home. Home equity is often the single largest asset in most retirees’ portfolios. Financial planners and retirees are paying more attention to housing wealth as a viable retirement asset. Very simply, a reverse mortgage reverses the process of a normal loan. Instead of paying into the home equity, the home equity pays you.
The federal government initiated the Reverse Mortgage (RM) or Home Equity Conversion Mortgage (HECM) in the mid 1980’s under Pres. Reagan. It was in response to the real need for seniors to extend their retirement finances to meet the demands of longevity. Many people were retiring with Social Security as the primary means of income, and these funds were not enough. By creating a method to both eliminate your mortgage payment, and manage the wealth in your home, strides have been made to make the Golden Years more golden.
Over the years, FHA has made many positive changes to better protect homeowners. Reverse Mortgages have suffered from many myths, misconceptions, ignorance and bad information.
Some of the most common myths and misconceptions are:
- The bank owns my home. Very simply…NO! The bank does not own your home; you do. Just like any mortgage, a Deed of Trust is attached to the property. Only the owner is on the deed. When you leave your home permanently, you pay the mortgage off and keep the difference.
- When you have a reverse mortgage, you don’t have the option to sell your home. This is not true. It is just a mortgage. Like any mortgage, you have to pay it off when you sell. But, you CAN sell.
- It will affect my Social Security, Medicare, Medicaid or pensions. Again, the answer is NO. The proceeds from a HECM are not considered income. They are not taxable, and do not affect the means testing for income with any program. If handled properly, the assets from a HECM can also benefit someone receiving Medicaid for Healthcare.
- I will not have anything to leave my heirs. That is not true. Under almost all normal circumstances there will be equity left in the home when the house is sold or passed on to heirs. However, one feature is a huge benefit. A reverse mortgage is a NON-RECOURSE LOAN. That means if you end up owing more than your house is worth, you and your heirs are held harmless. There is nothing more owed.
- A Reverse Mortgage is only a last resort. This is not true. More and more financial planners are seeing the need to incorporate the wealth in the home as part of a prudent financial plan to provide and extend all the retirement funds available. Managed correctly, people end up with more money to pass on to their heirs using housing wealth than when they don’t.
WHAT ARE THE QUALIFICATIONS FOR A REVERSE MORTGAGE?
- One borrower/spouse must be 62 years or older. The age of the younger is used to calculate the funds available, even if he/she is younger than 62.
- Must be on your primary residence. You can own other homes, but you can only use a RM on your primary residence, defined as living there 6 months +1 day per year.
- There are financial requirements to make sure you have enough funds to pay your taxes, insurance and maintenance. Usually poor credit history is not an issue.
- HUD approved counseling by an independent 3rd party/agency is required.
- You must continue to live in the home as your primary residence, pay your taxes and homeowners insurance, as well as maintain your home.
Qualifications are MUCH less than with a regular mortgage. A reverse mortgage is not JUST for helping you get out of a financially hard time, even foreclosure, however it is uniquely able to do so. If you have serious financial issues, we may be able to help you.
WHAT ARE REASONS TO USE A REVERSE MORTGAGE?
- Pay off current mortgage. If you can eliminate your mortgage payment (principal & interest) it will greatly benefit your cash flow, extending your other resources.
- Use the Line of Credit (LOC) feature to supplement your other investments. Using the LOC for emergencies (home expenses, healthcare, down markets) instead of your other resources can help maximize their longevity.
- Use the LOC or monthly income from the reverse mortgage to delay taking Social Security until age 70. You can increase your monthly SSI significantly by waiting until 70.
- Provide funds to prepare your home to age in place (renovations). You can also use the funds to pay for in-home care.
- Maximize your retirement! Use the funds to do the things you have always wanted: travel, buy an RV, give money to family, buy a car, remodel your home, etc. You can use it for anything!
HOW CAN YOU RECEIVE THE FUNDS?
- If you want immediate use of funds, you can receive a majority of the funds after closing, and the remainder one year later.
- You can leave the funds in a line of credit (LOC) that has a guaranteed growth factor of about 5% compounded annually. The longer you leave the funds in the LOC, the larger the LOC grows, and the more funds you have access to when you decide to draw upon them. You can also convert the LOC to monthly income whenever you choose.
- You can receive monthly payments as income. It can be a payment for the rest of your life as long as you live in your home, or for a period of time.
- OR any combination of the above. It is very flexible!
WANT TO RIGHT-SIZE YOUR HOME?
If it is time to move because your home no longer fits your needs, a Reverse Mortgage can be used to purchase a primary residence, helping you RIGHT-SIZE. The process is just like using any FHA loan to purchase. The contract and buying process is very much the same as any other loan. There are a few minor differences.
What is the benefit? You can greatly increase your buying power! If you only have $150-200,000 in equity when you sell, you can use a RM to purchase a home of $250-300,000, or more depending on your age. Or, if you have $500,000 in equity after selling, you can use a portion of it to purchase, using a RM for the rest of the cost, and KEEP the remainder of your money in your pocket. For example, if you only use $250,000 as down payment, you can buy a home for $400,000+ and KEEP the remaining $250,000 to buttress your other resources.
MY HOME DOESN’T HAVE A MORTGAGE. HOW WOULD THIS BENEFIT ME?
- The line of credit is guaranteed to be there. What other funds do you have that are guaranteed, even if the market crashes? If stocks, bonds or Real Estate markets crash, what happens to your money? The Reverse Mortgage line of credit is unaffected. It provides a guaranteed source of funds no matter what happens. If all else crashes, it will be there.
- The line of credit is guaranteed to grow. The present growth factor is approximately 5%. Starting a LOC early allows funds to compound so you can have access to very large resources later. If you start with a LOC of $200,000 at 62 and let it grow, at 75 you will likely have around $400,000; in your 80’s you would have $600,000+. Whatever amount is in your LOC is GUARANTEED TO BE THERE.
- If you need monthly income, you can convert the LOC to income at any time.
- You can allow the LOC to grow as a way to fund long-term care, home care, emergencies, buy an RV, or leave an early inheritance. There are as many uses as there are people who have needs or dreams.
- You can extend your other resources, increasing your chances for financial success by having a LOC to draw upon when down-markets adversely affect your other funds.
- If you wait until you have an emergency, it is often too late.
For these reasons and more, financial advisors are increasingly willing to discuss the benefits of including home wealth as part of the strategy for an effective, successful financial plan for retirement.
Please contact me, to discuss your situation to see if a Reverse Mortgage is right and a benefit for you.
Bob Muni, NMLS 719030, Silver Leaf Mortgage 303-588-1335 or bobm@silverleafmortgages.com
