Could a reverse mortgage be right for you?
- March 9, 2018
- By: John R. Salter
If you are up late at night, you might have seen the TV commercials with your favorite stars of yesteryear and thought that reverse mortgages were only needed if you had nothing left—a last resort whenever every other option has been exhausted.
Changes to the FHA insured Home Equity Conversion Mortgage, or HECM, have changed the face of the reverse mortgage we once knew, opening the mortgage up to many more possible uses. In fact, the HECM program has been the focus of my research for the past few years as a faculty member of Texas Tech’s Personal Financial Planning program, where we have been searching for its possible uses in retirement planning to make sure you are able to sustain your standard of living for the rest of your life.
The HECM program can provide three main ways to utilize the equity built up in your home:
- Line of Credit – The unused credit line actually grows over time, allowing a higher benefit in later years. The credit line can be borrowed against, and paid back with flexibility.
- Monthly Payments – These payments, known as tenure payments, essentially convert home equity into annuity-like payments for as long as the owners remain in the home.
- Lump Sum – A larger distribution from the home equity, often used for issues such as large home maintenance, paying off a traditional mortgage, etc.
Payback of the mortgage is flexible; the loan can be paid back at any time, but any borrowed funds plus interest are ultimately due upon sale or death of the homeowner (the owner or owners on the mortgage). The portion of the upfront fee to FHA and ongoing charges if funds are borrowed are used to make the loan nonrecourse, meaning that upon sale or death the amount due will not exceed the market value of the home. Beware, of course, that any funds used are a debt and have to be repaid at some point—it is, after all, a loan.
So how can this help you? If you and your spouse or co-borrower are over 62, you are eligible to qualify. Even if you feel you are wealthy, the program can contribute to your future financial well-being. I will outline a few quick ideas we have researched and find credible—we are working on many more. (Note that the program has changed to allow a second borrower to be under age 62 and be on the loan, but understanding and care must be taken before making this decision.)
Replace a home equity line of credit (HELOC) – A traditional home equity line of credit, although “free” to set up, has a few drawbacks. For one, the lender can reduce, call, or cancel the line of credit at any time; this cannot happen with the HECM program. In addition, payback with an HEMC is flexible and voluntary and the unused line of credit actually grows over time.
As a last resort, rather than waiting to establish a reverse mortgage later, do it today and let it sit. The interest rate environment is such that you can have a larger line of credit today compared to what it would likely be in the future. You may never use it, but you won’t be mad that you paid for home insurance all these years and never had to use it either.
Refinance your mortgage – Provides flexibility in repayment or stop payments altogether, or to refinance a resetting HELOC.
Increase income – The monthly payment option allows you to draw monthly payments for the rest of your life.
I would encourage you not to automatically dismiss the idea of a reverse mortgage. Take the time to learn more about it and find out how it may fit your needs. The program is complex, so there is no way to fit all of the details in this column, but you can find a lender that is more than happy to help educate you—there are many out there.
By John Salter, PhD, CFP®
John is a partner and wealth manager at Evensky & Katz/Foldes Financial Wealth Management and associate professor of personal financial planning at Texas Tech University. He can be reached at [email protected].
References and Supplemental Reading
Pfau, Wade D. 2016. “Incorporating Home Equity into a Retirement Income Strategy.” Journal of Financial Planning 29 (4): 41–49.
Pfeiffer, Shaun, C. Angus Schaal, and John Salter. 2014. “HECM Reverse Mortgages: Now or Last Resort?” Journal of Financial Planning 27 (5): 44–51.
Salter, John R., Shaun A. Pfeiffer, and Harold R. Evensky. 2012. “Standby Reverse Mortgages: A Risk Management Tool for Retirement Distributions.” Journal of Financial Planning 25 (8): 40–48.