Home equity is one of the largest assets for many Americans. This may be especially true if you’re a retiree living in the DC Metropolitan area; the family home that you bought years ago is likely to be worth many times what you originally paid for it.
Besides selling your home and downsizing, a reverse mortgage may be an option to access the equity in your home. Financial professionals are increasingly recognizing the potential role that reverse mortgages can play in retirement planning. SageVest Wealth Management offers a brief summary of the program, its withdrawal methods, and how it compares to the more traditional Home Equity Line of Credit (HELOC).
Reverse mortgages (also known as Home Equity Conversion Mortgages, or HECM) are administered by the Department of Housing and Urban Development (HUD). Below are the key points related to participation in the program:
- A reverse mortgage can only be applied to your primary residence.
- You must be at least 62 years old and have paid off your mortgage or have significant equity in your home.
- Up to $625,500 of your home’s value can be applied to a Reverse Mortgage.
- Distributions are not included in your adjusted gross income.
- You cannot be delinquent on any Federal debt.
- A reverse mortgage is a non-recourse loan. This means that neither you nor your estate needs to pay back more than the value of the home – even if you end up in a negative equity situation, where you owe more than your home is worth.
- You still need to have the financial resources to pay your home’s property taxes, insurance, and other expenses.
- Only certain types of property qualify for a reverse mortgage. These include singe family homes and some condos.
You have a number of available options for reverse mortgage payment plans. These include:
- Lump Sum – You can take out a large amount at one time. However, the government discourages you from exceeding 60% of your available credit in the first year.
- Tenure Payment – You can elect to receive a fixed monthly payment for as long as you remain in the house.
- Term Payment – You can also receive a fixed monthly payment for a stated amount of time i.e., 20 years.
- Line of Credit – This is similar to a HELOC. You can take payments as and when you need them, or in regular installments, in whatever amount you need until the credit line is exhausted. You have no obligation to ever use the funds, or to pay any borrowed amounts back while you live in the home. The line of credit can also grow over time, independent of your home’s value. This is because you establish a starting value when you open the line, and that value grows each year, based upon the interest rate versus the value of your home.
Reverse Mortgage Versus HELOC
Both a reverse mortgage and a HELOC have different fees, cost structures (such as annual mortgage insurance premiums & upfront fees), and eligibility requirements, all of which may impact their suitability for you.
- Reverse mortgages don’t have to be paid back until you realize the value of your home, upon sale or death.
- A reverse mortgage can never be canceled or reduced.
- The principal limit, or amount available to borrow, can grow over time with a reverse mortgage, regardless of the value of your home.
- As a retiree, you may not have access to a HELOC if you don’t have a qualifying income.
One potentially advantageous strategy is to open a reverse mortgage early and then let it grow. Given the current low interest rate environment, the available balance could grow to a sizeable amount. You can then access it at a future date as either a potential line of credit or as an additional income source.
A reverse mortgage isn’t right for everyone. It’s a complex investment tool that requires careful consideration of your own unique financial situation and goals. Its potential value as part of your retirement planning depends on a host of factors, including the composition of your assets, your sources of income in retirement, your ultimate legacy goals, and more. We invite you to contact us to discuss this and other aspects of financial planning for your retirement.