We all know and are familiar with the standard mortgage (aka forward mortgage). If you want to consolidate your debt, buy a new home or refinance you can apply for a mortgage and, if you qualify, obtain the financing that you desire. The important question to ask yourself is: If you qualify, do you want additional monthly mortgage payments and is there a better use for your cash? And… what if you don’t qualify? What other options are available? Know your options, weigh your options, and make the best decision (which may be doing nothing). The goal of this article is to give you the information needed to help you do just that.
A reverse mortgage is not the only financial product option available to seniors. There are no-age-specific shared equity products that make upfront money available in exchange for owning a specified percentage of the home. The company then shares in the gain or the loss upon sale of the home by the owner.
Reverse mortgages offer a line of credit that you can tap into when you need it. The unused portion of your line of credit actually grows every month! You have the option to convert, at any time, to annuity-style monthly payments for a period of time, or for the rest of your life, or you can just build in additional security and use it as a rainy-day account. Immediate cash flow can be created by paying off an existing mortgage loan. A reverse mortgage is now a versatile, safe and effective retirement planning tool to meet a variety of needs.
Just what exactly is a reverse mortgage?
A reverse mortgage is a way for borrowers age 62 or older to purchase a property or unlock the equity in their home by turning it into tax-free cash (consult with your tax adviser) without having to make any monthly mortgage payments (real estate taxes and insurance must still be paid). How do you qualify?
1. The borrower on title must be 62 years or older (a non-borrowing spouse may be under age 62).
2. The home must be the borrower’s primary residence.
3. The borrower must own and live in the home as a primary residence.
4. Borrowers must continue paying property taxes and homeowners insurance, maintain the home, and otherwise comply with the loan terms.
Strategic uses of a reverse mortgage for retirement planning:
1. Delay Social Security benefits and let investments grow. Determining when to take Social Security is one of the most important decisions a retiree can make because it’s lifetime income. You can use reverse mortgage proceeds to delay taking Social Security benefits for as long as possible, allowing you to receive a greater monthly income in the future.
2. Protection from investment downturns. A reverse mortgage may help minimize risk in retirement during your investment portfolio’s volatility cycles The strategy would be to take a reverse mortgage after 62 years of age, but only to be drawn upon if the portfolio underperforms to allow a recovery.
3. Grow Retirement with the HECM Growing Line of Credit. The reverse mortgage unused portion of the line of credit grows at an interest rate that is equal to the current loan rates. This line of credit also includes a compounding feature so that available credit increases each period on the prior period’s available credit balance. At any time, the line of credit can be accessed for incidental cash or even converted to monthly term or tenure payments, similar to annuity payments.
Using these active strategies, cash reserves are made available upfront and incorporated into a plan, giving your portfolio the maximum amount of time to grow and the best possible chance of survival. You can still live in your home without making monthly mortgage payments, feel confident about being financially prepared for emergencies, have a growing line of credit available to you while improving your Social Security opportunity—all while maintaining your desired quality of life. Simple and effective.
Important Consumer Safeguards
There is No Pre-Payment Penalty
Non-recourse Loan HECMs are considered nonrecourse loans. Neither you nor your heirs will ever owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt.
Major change! Non-borrowing spouse is a spouse under the age of 62. New loan amounts are available to borrowers with a no-borrowing spouse under the age of 62. New rules also allow the eligible spouses, under 62 years of age, of borrowers who pass away to stay in the home without foreclosure. The surviving spouse must continue to pay taxes, homeowner’s insurance, home maintenance, and otherwise comply with the loan terms.
Shared Equity Products
Many senior adults may not qualify for reverse mortgages. They may have too much debt on their home and may not have enough proceeds to satisfy that debt. The following equity-share options may be worth considering as an alternative after a thorough analysis has been made. These programs are an alternative method of equity release to traditional home equity line of credits (HELOCs) and reverse mortgages without the challenges associated to qualify.
Irene enables older adults to retire in the comfort of their own home by providing a simple, safe, and debt-free retirement solution. Available only in New Jersey for now, and they offer two programs. The first, Safe Stay, is designed for those with low outstanding mortgage balances to secure retirement in their home. The second, Safe Lease Back, is designed for those who need to access a larger share of their home equity upfront.
With the Safe Stay product, customers sell their homes to Irene and continue to live there for the remainder of their lives, with Irene inheriting the house upon death. Typically, these borrowers have a lower outstanding mortgage balance.
The Safe Lease Back is targeted at those who need to access a larger portion of their equity and have higher outstanding balances. It allows homeowners to sell their homes to Irene and then pay monthly rent to stay in the dwelling. With both programs, as the new owner, Irene pays for insurance, taxes and the structural upkeep on the home. The amount of cash that homeowners can access depends on factors like the home’s value and existing debt.
Unison offers between 5 percent and 17.5 percent of a home’s value, with “no monthly payments, no interest payments and no debt,” according to its website. Unison weathers any losses or gains on the house when it is sold, up to 30 years in the future. The shared investor percentage may be between 20 percent and 70 percent. There is a one-time 3.9 percent transaction fee. https://www.unison.com/homeowner/
Easy Knock’s “Sell and Stay” allows homeowners to immediately convert all of their equity to cash, minus a 2 percent easyknock fee and 1.5 percent closing cost fee (subject to complexity). The homeowner sells their home to EasyKnock and then becomes a renter with the right to repurchase the home later. There is no age barrier. Unlike a reverse mortgage, you do not have to be at 62 years of age. The consumer can move at any time or buy back the house. https://www.easyknock.com
By Carl E. Guzman CPA