Did you know that over 10,000 people per day are retiring here in the United States? 10,000! That is a lot of people.
I often wonder how many want to but don't believe they can afford it. Could it be a 1,000 or more???
Unfortunately most people tend to underestimate their life expectancy, save less than they should and fail to consider how much health care might cost in retirement.
In this day and age we are living longer, we are also experiencing more health issues with our increased life expectancy. The typical 65-year old couple will need at least $300,000 to cover out-of-pocket health care costs over their lifetime. Most people have not planned for these type of expenses. Increased life expectancy and unexpected expenses increase the possibility of outliving your assets.
As baby boomers move into retirement without sufficient income sources, many Americans are going to be unable to meet their basic financial needs in retirement.
Reverse mortgages are another tool in the retirement toolbox that could offer seniors cash flow needed to cover living costs. Admittedly, Americans have a strong negative bias toward reverse mortgages. Much of that negative bias is rooted in misconceptions and issues with bygone reverse mortgage issues. The reverse mortgages of today are not the same as reverse mortgages 10 year ago. As such, reverse mortgages deserve a second look today.
One of the most common misconceptions is that the bank will own your home if you take out a reverse mortgage when in actuality, with a reverse mortgage loan, borrowers retain ownership of their home, as long as they stay current on their property taxes, homeowner's insurance and otherwise comply with the loan terms.
The market has become simplified in recent years. The Home Equity Conversion Mortgage (HECM) is used for nearly all reverse mortgages. It is essentially a government loan sold by private companies.
For most people looking to retire, the majority of their wealth is stored in their home, which is not a very liquid asset. A reverse mortgage is a way for homeowners to unlock some of the equity in their home without having to make monthly mortgage payments.
Who is eligible? To be eligible for a Home Equity Conversion Mortgage, you must be a homeowner 62 or older, own your home outright or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan. You need to have sufficient financial resources to pay for property taxes and insurance, and you must live in the home.
The HECM becomes due and payable when the last remaining homeowner leaves the home permanently. You don't lose your home at that time, the mortgage just needs satisfied.
A reverse mortgage is a non-recourse loan, as the home is the only collateral that can be used to repay the loan balance. This means that if the sale of the home does not cover the entire loan balance, then FHA pays the difference, not the borrower's family.
How much could a borrower expect to receive? Depending on their age, homeowners typically can tap between 50 percent and 75 percent of the home's appraised value, with a maximum loan limit of $625,500. The older the borrower and the lower the interest rate, the higher the available loan amount.
Another option that's growing in popularity is one where a borrower takes out a reverse mortgage standby line of credit. This is a great option for borrowers who aren't interested in tapping their equity unless an emergency arises or when they feel the funds are needed.
Tapping into your home equity through a reverse mortgage HECM line of credit can be an effective way to avoid selling your investments when they drop in value as well.
For Example, let's say the market drops 20 percent next year. Would you rather sell your stocks that are down 20 percent to get your retirement income or would you rather borrow from your home equity at 4 to 5 percent interest? Studies have shown that you would be much better off using your home equity in a down market year. Doing this could substantially increase the sustainability of your retirement portfolio and help make your money last for a lifetime.
Contact me if you have any questions? You may be able to help someone retire and live the life they dreamed of.