A reverse mortgage might not be the perfect solution for everybody, but they can provide a wealth of relief for some retirees, according to a recent article from The Mortgage Professor.
U.S. retirees today are faced with substantial challenges. Some may have seen their investments decimated by the recent housing crash and financial crisis, while others might find it difficult to simply save enough for retirement as they wrestle with other expenses.
Depending on retirees’ personal needs, reverse mortgages may in some cases ease retirement burdens, such as paying off an existing mortgage, while also helping borrowers optimize Social Security or other assets.
In a recent article, Jack Guttentag, a.k.a The Mortgage Professor, discusses five ways a reverse mortgage can ease the retirement of older homeowners, including using a Home Equity Conversion Mortgage to eliminate existing mortgage debt.
“Many homeowners today choose to retire, or are obliged to, before they have fully paid off their mortgage,” Guttentag writes. “With their income reduced, the required monthly mortgage payment can become heavily burdensome.”
If the borrower is 62, the balance of their existing mortgage can be paid off using a reverse mortgage if it does not exceed 50% of the home’s value, however, this cutoff rises to about 68% for a borrower aged 87, Guttentag noted.
Another widely touted merit of reverse mortgages is they can enable older homeowners to delay collecting Social Security, so they may be able to receive higher benefits when they collet at a later age.
“For most seniors, waiting until age 70 before collecting social security, as opposed to taking a smaller amount earlier, is an excellent investment,” Guttentag writes.
A typical senior who could draw $1,350 a month at age 62 would see the draw increase to $2,376 at age 70, he notes. Even still, Guttentag notes that most workers eligible for Social Security tap into these benefits early.
“One major reason is that they are short of income,” Guttentag writes. “This can be remedied if they are homeowners with equity.”
Not even that much equity is needed, he adds.
“If the borrower is 62, a monthly payment of $1,000 covering the 8 years until age 70 is available with equity of $155,000,” Guttentag writes. “At age 67, when the payment term is only 3 years, the required equity is only $66,000. If the borrower has more equity than needed, all the better, it can be drawn on to meet other needs as they arise.”
Reverse mortgages can also help ease retirement in several other ways, according to Guttentag.
These include utilizing the tenure payment option to receive lifetime cash flow; using a reverse mortgage credit line to accumulate a reserve fund that can be used to protect against the risk of outliving one’s money; and taking advantage of the Home Equity Conversion Mortgage for Purchase product to downsize without having to tap into other assets to pay for the home purchase.
Read more from The Mortgage Professor.
Written by Jason Oliva