Our homes are often our largest asset. Over the years we have worked hard to pay down, and for some, paid off the mortgage and hopefully the value of the home has appreciated in value.
What alternative do you have if you want to stay in place but do not have quite enough retirement savings and investments to maintain your current home?
Too often, the only thing we can think of to do is to release the equity in the property by selling and renting. Rent can be covered by the proceeds from the sale. But, rents can be high. Sometimes the expense of keeping your home may be less than renting especially if the mortgage has been paid off but you really have to crunch the numbers.
If you are 62 or older, another alternative to use is a reverse mortgage. Reverse mortgages offer several options to unlock the equity in your home. The proceeds or equity can be taken out in a line-of-credit, in a lump sum, a combination of the two or through an annuity type of monthly payout referred to as a tenure payment. Repayment of the advances are deferred until the property is sold.
To qualify for a reverse mortgage there can be no existing mortgage balance. There are no monthly payments with a reverse mortgage. Repayment of the mortgage proceeds paid to you are due to be repaid when you die and/or sell the property. You still will need to pay your property taxes and homeowner’s insurance as well as keeping up with basic maintenance and repairs.
One of the draw backs that may be of concern is the cost of securing a reverse mortgage initially. Reverse mortgages have large upfront fees compared to a regular mortgage, due of the cost of the required government insurance premiums. An explanation of those fees can be found here.
If you were planning on leaving the property to your heirs, they will need to sell or refinance the property to repay the reverse mortgage balance from the advances paid to you. If your spouse is under the age of 62, your spouse will be considered a non-borrowing spouse. Before recent rule changes, a non-borrowing spouse needed to vacate the property when the borrowing spouse (who was 62 or over) died. Now this spouse can stay in the home but cannot draw down any more funds. But, there are ways around the surviving spouse issue. Jack Guttentag has a good article explaining some of the tricks: Arranging reverse-mortgage spousal benefits.
A good place for more information on reverse mortgages is with the consumer information provided by the Federal Trade Commission.
If you have any questions, be sure to let us know!
Bill Mayer CFP®
BMayer@AddisHill.com
