Recently, I had a few conversations with clients about their retirement portfolios. In these cases, there was some disappointment with the returns that the markets have provided, or not provided, in the last couple of years. For them, and I suspect other clients as well, there’s an added complication: taking big distributions every month, or every year, can reduce the IRA balance significantly and quickly. They fear they’re running out of money.
These discussions have led to my taking a refresher course on the concept of a reverse mortgage, loans that let you borrow against the value of your home, but don’t require repayment while you’re still living in it. This type of loan has been around for a while, but it may become more popular for several reasons. Here is what I learned.
Five Things You Should Know About Reverse Mortgages:
- Federal laws and regulations implemented in 2013 and 2015 were the game-changers. Added safeguards make these government-backed loans safer for both the borrower (especially seniors) and the banker, and also cheaper than they used to be (but still more expensive than a traditional home-equity line of credit). Most reverse mortgages today are Home Equity Conversion Mortgages (HECMs), a type of Federal Housing Administration (FHA) insured reverse mortgage. Home Equity Conversion Mortgages allow seniors, age 62 or older, to convert the equity in their home to cash up front, or a line of credit.
- Your age is a factor. The older you are, and the more equity you have in your home, the more you can borrow. The loan can amount from 50% to 70% of your home’s value. (You can estimate your borrowing limit at reversemortage.org)
- You’ll have a safety net. You can take the loan as a lump sum, monthly payments, or a line of credit. But the borrowing has no set time limit. And the lender can’t freeze, cancel, or reduce your credit line; in fact, it’ll grow over time whether you use it or not! The newer rules have the government on the hook in case the reverse mortgage ever grows to exceed the home’s value. Plus, if one spouse dies, or has to go to a nursing home, the non-borrowing spouse can’t be kicked out.
- There can be multiple benefits. If you’re 62 or older, you can establish a line of credit with an HECM, whether you need the money now or not. You might need it later. That credit line will grow annually, perhaps substantially over the years. When you do tap your credit line, you pay no income taxes. This added borrowing might relieve some financial pressure. Perhaps you’d postpone receiving your Social Security benefits, or reduce withdrawals from your IRA, or pay the taxes from a Roth conversion, or undertake some age-in-place renovations to your home. A lump sum withdrawal might be used to pay off an existing mortgage, perhaps entirely, or more quickly, and thus reduce the expense of monthly mortgage payments.
- You can still get into trouble. If you don’t pay your property taxes and your homeowner insurance, you can still lose your house. If you want to move out of the home, the HECM must be paid off (it holds a lien on your house). So if you can’t live with these restrictions, downsizing is probably a better idea.
Your retirement portfolio should not be the only resource you use for your income. I’ve always been a proponent of the 3-legged stool for income stability. For many people, the HECM can become one of those legs.