It can be a very tough experience for a senior to take a hard look at their retirement plan, and realize that they may not have enough financial resources to make ends meet for the duration of their post-working lives. This is why for some, it may be practical to look at the equity that a homeowner has built up over time, learning about ways that equity could be employed to play a role in retirement financing.
There is more than one way to tap home equity in retirement, but four particular methods are the subject of a new column in Forbes designed for a retiree assessing all of the options that might be available.
Although not presented as the first option in the article itself, a reverse mortgage is one of the four primary methods the authors tackle, describing the reverse mortgage product category with context the industry may find generally helpful.
“A survey by Fannie Mae found that less than half of seniors said they were familiar with reverse mortgages,” the article says. “But even if you do know how they work, you may be circumspect. In the same survey, 20% of participants said they were concerned about ‘getting scammed’ if they took out a reverse mortgage.”
Many people may be averse to reverse mortgages because of stories in the press or in the larger media that have related difficult situations that seniors have found themselves in, but the article aims to make clear that modern reverse mortgages look a bit different than they used to.
“It’s a different market today,” the article reads. “The vast majority of reverse mortgages are insured by the Federal Housing Administration (FHA). And over the past few years, the FHA has imposed rules that better safeguard borrowers for its reverse mortgages, which it calls Home Equity Conversion Mortgages (HECMs). Recently, retirement experts in financial planning and academia have gotten on board with reverse mortgages and HECMs, publishing research that shows how using a reverse mortgage can be a smart way to generate more retirement income.”
That’s not to say that reverse mortgages are simplistic financial tools, since as the article points out, they most certainly are not. It describes upfront costs as “potentially steep” and describes the existence of specific guidelines governing how long someone can live outside of the loan while conforming to the loan’s terms. It even goes as far as to recommend additional professional assistance in understanding the potential impact of the option on a person’s situation.
“You may want to consider hiring a financial planner who is familiar with the HECM program to help you figure out if it’s a good fit,” the column reads. “Many planners will take on a project for a fixed or hourly fee.”
The other three recommendations in terms of home equity tapping options are a home equity loan (or “second mortgage”); a home equity line of credit (HELOC); or simply downsizing the home.
Read the article at Forbes.