Cash flow management in retirement is the best single phrase to summarize the many advantages of shifting to a payment-optional reverse mortgage. Once cash is gone, so are choices.
A reverse mortgage can put those who choose to plan more firmly in control of their independence.
And for those who don’t believe me, just ask my clients whose kids are pushing them to sell and rent as their savings dwindle. Not an envious family dynamic, and one I try to help clients sidestep.
Choice Over Need
The reverse borrower of today is equity-rich, looking to proactively protect their independence and remain in the neighborhood they’ve called home for decades.
There is frequently a built-in support network of neighbors willing to lend a hand as needed.
There is familiarity and a sense of security that a forced move would irreparably disrupt. An element too often overlooked by those giving “advice.”
While their reasons and circumstances vary, the stigma is lifting, and lives are being changed.
Top Three Reasons for a Reverse
- Cash flow flexibility: replacing an existing mortgage with a payment optional reverse that also provides a growing line of credit creates an extra safety net. Payments can flex with changing needs and even be completely deferred. Payments into the loan are applied to the line of credit and available to be redrawn at any time.
- Wealth preservation: using the line of credit in a down market versus drawing from investments, a non-taxable income supplement to delay drawing social security, a cash backup for large, unexpected cash needs, all giving home equity an active role in preserving overall wealth.
- Retaining control: once savings are depleted to support maintenance, property taxes, and insurance, control over future decisions often becomes the “family plan.”
Families are not always in agreement on the best solution.
The Big Win
You only pay for what you use. When you convert your home equity to a line of credit with the FHA-insured Home Equity Conversion Mortgage, HECM for short, proceeds remain in a line of credit until you’re ready to use them. There is no ongoing fee charged to retain or access the line of credit.
- Draws are home equity, not income, therefore not reported for tax purposes
- The line of credit is available as long as you live in your home and keep your property charges (taxes and insurance) current. It can never be frozen or called due
- A growth factor is applied monthly to the line of credit balance, so available equity increases over time
- Payments remain optional for the life of the loan
- You do NOT need to requalify every year, simply occupy the home and pay property charges
- This loan replaces any existing mortgage or HELOC
- ONLY the homeowners are on title, no bank “owns” the home
- No one takes your equity or any portion of it. It is made available for the homeowner to spend
- Neither the homeowner nor the heirs can ever owe more than the home’s appraised value.
The Quest for Free and Clear
Choosing to stay in your home for the duration of retirement requires careful planning, especially if you fall into the 28% of homeowners over age 65 still making a mortgage payment.
The quest to pay off that mortgage can often deplete savings early, with a persistent need to excessively supplement income as overall living costs continue to climb.
Consider a shift in thinking with the focus on future needs. Not having a mortgage payment at a later date at the expense of not having saved for future needs, removes choices.
You’re in Good Company
There is a growing trend across a diverse demographic to explore the “best” way to fund retirement, and for many, to leave some behind for heirs. Financial advisers are looking at the numbers earlier in their clients’ retirement, exploring the potential positive that could be gleaned.
Homeowners are asking questions, attending educational events, and finding trusted sources for good information that can share specifics on what a reverse mortgage could do to shore up their independence.
Ask Early
The best plan is to have a plan. Can a reverse mortgage be a bailout? Maybe. But if the ask starts with the words “upside down” or “deferred property taxes,” it could be too late.
Time to Move On
The early misfires in equity access with reverse mortgages included: no financial assessment, no continued-occupancy spouse protection, and no checks and balances with third-party counseling. Those are history. Let it go. These loans are amazing game-changers for so many. If you’ve never seen the numbers, you have no place chiming in. Just saying.
About the Photo
Jean is one of those 80+ year old women who took ownership of her future and created a plan through a reverse mortgage. Here’s what she did:
- Paid off the small balance owing on her existing mortgage
- Added back just over $1200 per month in the absence of a mortgage payment
- Established a line of credit that will cover property charge payments: insurance, property taxes and likely most of her maintenance for as long as she chooses to stay in her home.
- Found her path to stay in her home of 25+ years, near all her “girlfriends” with a host of helpful neighbors
- Shored up a fund for airfare to visit out-of-state grandkids
Go Jean!
The tequila is its own story. Let’s just say, business is personal for me.
