Reverse mortgages can be powerful cash generators in those post-career years, when used properly. Anyone who might be interested in using a reverse mortgage in the next few years should consider lining one up now.
This is a good reverse mortgage shopping time because interest rates are bottoming. Though you don’t make regular loan payments under a reverse mortgage, there is an interest charge. Also, home prices have recovered from their lows in most areas, so you can borrow more now than you could have a few years ago.
To take out a government-guaranteed reverse mortgage, you must be 62 or older and own a home. The more equity you have in the home, the more you might be able to borrow, with a current loan limit for FHA-guaranteed loans of $625,500. The older you are, the more of the home equity you are able to borrow.
You can receive either a lump sum, a stream of payments, or access to a home equity line. You make no payments on the loan while you are residing in the home. Instead, interest and fees plus principal accumulate over the years. After you pass away or no longer reside in the home, the lender is paid from the home sale proceeds.
Traditionally a reverse mortgage is best for someone in the late 70s or older who needs the cash to meet expenses but doesn’t want to leave the home. With changes in the market, however, there are different scenarios when a reverse mortgage makes sense.
You can set up a home equity line of credit to be used only when needed. Having this ready source of emergency cash means you can avoid selling assets at inopportune times. When a sudden, large expense is accompanied by a sharp market downturn, you don’t have to sell assets at low prices to meet the expense. Instead, draw on the home equity reverse mortgage.
The home equity reverse mortgage also allows you to delay Social Security benefits. Delaying benefits is profitable, because your benefit increases by 8% each year you delay. If cash is tight in the years before age 70, a home equity line of credit can supplement your cash flow while you’re waiting to apply for maximum Social Security benefits.
Likewise, a home equity line of credit can help with income tax planning. The loan proceeds are tax free. Being able to draw a little something from the line of credit can save substantial taxes and surtaxes for some people. A traditional IRA or annuity withdrawal is taxed as ordinary income. In addition, increasing your gross income might trigger a series of higher assessments. It could increase taxes on Social Security benefits, boost Medicare premiums, reduce itemized deductions and personal exemptions, and more. Mixing some nontaxable home equity withdrawals into your cash flow could avoid that avalanche of additional taxes.
A reverse mortgage also might pay you more than your home equity. Some people take home equity loans as monthly payouts that last as long as the youngest owner lives. That means if you or your spouse lives well beyond Life Expectancy, you’ll receive more than you bargained for. The government guarantee pays the lender the difference
Reverse mortgages aren’t without disadvantages. They’re somewhat complicated. They have several types of fees, and the fees can mount. Also, the amount of the equity withdrawals plus the fees and expenses come out of your estate. They won’t go to heirs and loved ones.
RW December 2013.