How do Reverse Mortgages fit in with overall retirement planning?
As the number of baby boomers entering retirement continues to grow, many are faced with the challenge of figuring out how to use their assets wisely. There are a wide range of considerations when planning for retirement, including figuring out where you want to live and how much money you need to retire comfortably.
While a reverse mortgage might not be the answer for everyone, more financial planners are including it as an option to help seniors age in place during retirement.
Reverse Mortgages and the Overall Financial Picture
A major part of retirement planning is assessing your expected costs of living, and how your monthly expenses compare with your monthly income, which could come from a variety of sources including reverse mortgage proceeds, savings, Social Security, investment proceeds, or a pension.
A federally-insured reverse mortgage, taken as a lump sum, monthly payments or line of credit (or some combination) may be able to improve your financial picture depending on your needs.
A lump-sum reverse mortgage could help eliminate the burden of monthly mortgage payments by paying off the remainder of your existing mortgage balance.
Choosing to receive reverse mortgage payments on a monthly basis instead could supplement your income to cover food, utility, or medication costs, along with your other expenses.
A line of credit, which grows over time, is a third option, and it can be used under the standard government reverse mortgage program, or under the new “Saver” product, which offers lower upfront fees and a lower amount that can be borrowed.
Regardless of the type of reverse mortgage, recent studies have shown an improvement in retirement preparedness for those who plan to take advantage of the loans as a comprehensive approach.
“The conventional wisdom holds that home equity, drawn upon in the form of a reverse mortgage or similar product, should be used as a last resort, only if and when the [retirement] account is exhausted,” wrote financial experts Sacks and Sacks, who recently conducted a study on reverse mortgages and financial planning, published in the February 2012 Journal of Financial Planning.
“This is a rather passive approach. We show that the probability of cash flow survival is substantially enhanced by reversing the conventional wisdom.”
Do You Want to Age in Place?
A 2010 AARP study reports that nearly 90% of people over age 65 indicate they want to stay in their home as long as possible and a reverse mortgage can help make that happen.
Using the equity from your home, you can make various repairs around the house, such as updating your kitchen, installing a new furnace, or repairing your roof.
The loan proceeds can also be used to install ramps, a stair lift or even an elevator, or to make bathrooms safer with accessible tubs/showers and well-placed grab bars.
Getting health care at home is also a growing trend that can be much more affordable than entering a designated retirement community, and reverse mortgage proceeds can also be used to help pay for in-home health care.
Medicare and Supplemental Security Income
Eligibility for certain means-tested benefits programs is something else to think about when considering a reverse mortgage and deciding what kind of payment system is best for you.
Because you must be at least 62 years old to qualify for this type of loan, many reverse mortgage borrowers are also at an age where they may qualify for benefits programs such as Medicaid or Supplemental Security Income (SSI). They’re both means-tested programs, meaning your income and assets are considered when determining if you qualify.
Reverse mortgage proceeds are not considered income, as you are simply drawing down your home’s equity.
However, if you have opted to receive a lump-sum payment from your reverse mortgage, and have those proceeds sitting in a bank account, those funds may be considered an asset and could affect your eligibility for Medicaid and SSI, according to a NeighborWorks, a national organization that provides reverse mortgage counseling to prospective borrowers. It’s important to talk with a tax advisor to ensure a reverse mortgage will not disqualify you from receiving current benefits.
Your Heirs and Estate
Before taking out a reverse mortgage, it’s important to understand the impact of a reverse mortgage on your family and estate. If you decide to take out the loan, it must eventually be repaid.
When you pass away or leave your home permanently, the loan becomes due. Often, your heirs will be left to repay the loan through the sale of the home. Often, there’s enough remaining home equity that your heirs could sell your house, pay back the lender, and keep any money that is left over.
Even if the loan balance exceeds the value of the home, your heirs will not be required to pay more than the home is worth. This is one of the biggest benefits of obtaining a reverse mortgage insured by the Federal Housing Administration.
If you do plan on leaving your home to your kids through a will, some financial planners suggest putting the home in a revocable trust (which allows for reverse mortgages, although irrevocable trusts do not), or setting up a transfer-on-death designation (TOD).
Doing either of these options allows heirs to avoid the cost of probate and federal estate taxes. Placing your home in a trust or having a TOD designation means that your assets will automatically transfer to a trustee or designated beneficiary upon your death, without having to go through the probate process.
Your beneficiaries will still be responsible to settle your debts and repay your reverse mortgage loan, but they won’t be faced with probate court costs.
How Does a Reverse Mortgage Fit Into Your Retirement?
There are many factors that play into retirement planning, and it’s important to learn how reverse mortgages could impact key considerations such as location, cash flow, and your beneficiaries.
If you’re interested in finding out more about how a reverse mortgage retirement plan could help make retirement possible for you, don’t hesitate to contact us