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Mortgage, Personal Finance, Retirement

Reverse Mortgages Should be Reconsidered in Retirement Planning

Once widely criticized, Reverse Mortgages are getting a second look.

Too many baby boomers are retiring with insufficient savings.

Many of these boomers are “house rich” and “cash poor,” and in response to their circumstances, they may decide to utilize a reverse mortgage. That move could make funding their retirement much easier and greatly increase the quality and longevity of their retirement.

Opinions about reverse mortgages are changing rapidly.

Once saddled with an image problem, they are now seen as useful instruments for producing additional retirement income. Just like any mortgage, they are not without risk.

Today a Reverse Mortgage is looked at as a smart choice; an opportunity, a financial planning opportunity to utilize a large retirement asset, just like an IRA or 401-k throughout their retirement.

Does borrowing against the value of a home while in retirement seem like a clever idea or not?

The average American household has about 75% of their net worth in real estate and very little saved through traditional retirement means; such as a company pension, 401-k, or a Traditional IRA.

These retirees have been led to believe, effectively lied to, that having a mortgage-free home increases the longevity of their retirement. Sadly, this is not the case in most instances.

This old-age thinking erupted from the experiences of their parents the “The Greatest Generation.”

These parents of the Baby Boomers had company pensions and Social Security.

Growing up through the Great Depression, The Greatest Generation rapidly paid their mortgage because the bank could call the loan until it was re-paid by the borrower.

During this time there was no such thing as a 30 year fixed mortgage. Maintaining this same same “Depression” thinking today can hinder a retirement and make it a risky proposition.

The Journal of Accountancy had a great article on What role should your house have in retirement planning? You can read it here.

Not everyone is eligible for a reverse mortgage.

Most Reverse mortgages are insured by the Federal Housing Administration (FHA), which imposes some rules and has stricter financial requirements.

  1. The couple or individual applying for the loan must be age 62 or older.
  2. The home involved must have a certain level of equity.
  3. The borrower(s) must have the means to pay property taxes and insurance.
  4. The borrower(s) must pay a fee to attend a counseling session on reverse mortgages.

In addition, you cannot have a reverse mortgage and be delinquent on any federal debt.

The Reverse Mortgage loan can be as large as $822,375. 2022 limit will be $970,800! (updated)

The limit varies per county, and three other factors can influence the loan amount – interest rates, the appraised value of the residence, and the age of the borrower(s).

A retiree household can access the money in one of three ways – as a lump sum, as a monthly income stream, or as a line of credit, letting the money grow. Borrowers usually cannot acquire more than 60% of the home value within the first year.

Interest accrues during the life of a reverse mortgage, so the loan grows larger over time.

A reverse mortgage is a non-recourse loan, though, meaning that the borrower is never personally liable for repayment.

A reverse mortgage only needs to be repaid once the borrower dies, sells the home, or moves out of the home.

Stronger spousal protections were put in place during 2015.

If one spouse dies or moves out of the home the remaining spouse can stay as long as it’s their primary residence.  Even if they were not originally listed on the loan. Additionally, with Reverse mortgages, the taxes and insurance need to be paid.

Health Care costs are skyrocketing.

Today retirees are living much longer and medical costs are only going up. Fidelity estimates the average retired couple will spend $300,000 during retirement for just medical costs. You can read the article here. Where would this money come from?

Inflation and taxes are only going up.

During 10 years of retirement and 4% inflation, your social security check just got 40% less. Think the government won’t tax Social Security? Think again.  Rising Medicare premiums is the ultimate back door tax of Social Security and they are going up fast!

Reverse Mortgages can help guard against inflation and be a safety net against rising healthcare costs.

ANNUVA Financial is a comprehensive Retirement Income Planning firm. If you believe your financial future is worth a quick conversation with one of our professional advisers, call us at 800-282-2004. There’s no obligation.

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