What the Ideal Reverse Mortgage Candidate Looks Like – Part 1
My grandfather, who passed away years ago, was a man I greatly admired. He was a decorated pilot who flew cargo missions over the Himalayas in World War II. He risked his life serving in the vital supply link that helped the Allies win the war in Asia.
After the war, he became a successful engineer who worked on complex construction projects such as nuclear power plants. He did well for himself, saved diligently, and retired with a comfortable lifestyle.
Fear of Running Out of Money in Retirement
Even though he was well off, I remember how he clung to his money in his later years. He resisted spending it on even modest purchases. I didn’t understand why until I began working with seniors as a professional in the reverse mortgage industry. I realized that my grandfather, like many seniors, had a very deep and visceral fear of running out of money.
This fear makes perfect sense to me now. When you’re retired, you have limited capacity to earn. You also have no idea how long you’ll live. And what happens if you get hit with a big home repair or medical bill? Large unexpected expenses can drain your savings rapidly and increase the risk of running out of money years earlier than expected.
The Option of Home Equity
This is why I think it’s so important for home equity to be part of the retirement planning picture. Home equity is for many seniors their largest asset. Even today, after 30 years of educational efforts by HUD, FHA, reverse mortgage lenders, and industry organizations, relatively few seniors take advantage of their home equity to live a more financially secure retirement.
So far, I’ve tackled the most common reverse mortgage misconceptions, and illustrated the basics about how a reverse mortgage works. Now let’s see how a reverse mortgage can improve, protect, and preserve your retirement financial security and lifestyle.
A Financial Safety Net
Contrary to popular misconception, the reverse mortgage is not a loan of last resort for broke and desperate people. Such people often don’t qualify.
The best reverse mortgage candidates are at least reasonably financially stable. They can strategically use the reverse mortgage to enhance and protect their retirement lifestyle and financial security.
The reverse mortgage is not a lifeboat, it’s a financial safety net.
In fact, many wealthy seniors take advantage of a reverse mortgage. I did a reverse mortgage for a gentleman a few years ago who had a net worth north of $5 million. Did he really need a reverse mortgage? No! But he wanted one because it offered him cash management options he wouldn’t otherwise have.
If you are at least 62 years of age and you have substantial home equity, it’s likely a reverse mortgage can benefit you in some way. Having said that, I think some seniors can benefit more than most. Such seniors tend to fit one three profiles:
- Owe little to nothing on their homes and don’t need the money right now.
- Have a large mortgage balance with many years left to pay before it’s paid off.
- Want to purchase their forever home.
I’m going to cover each of these profiles in more detail today and in future articles.
The “Unusable” Asset
Think about your home equity for a moment. How does it impact your life? If you never plan to sell your home, what does it matter if you have one dollar or a million dollars’ worth of home equity?
Your home equity might be an impressive number on paper, but it has little to no practical impact on your life unless you plan on selling your home.
Case in point: there are seniors right now living in the San Francisco Bay area with more than $1 million worth of home equity, yet they’re practically living on cat food. They are technically millionaires, but they’re barely getting by on a meager Social Security check.
Home equity only has a tangible impact on your life if you can convert it into cash.
In the past, there were largely just two ways to convert home equity into cash:
- Cash out refinance.
- Sell the home.
Obviously, the first option makes no sense if you’re trying to improve your monthly cash flow. If you want more money to work with, it doesn’t make sense to saddle yourself with a mortgage payment for the next 30 years. The second option makes no sense if the goal is to continue living in your home.
The reverse mortgage was created to offer a third and better option. It enables seniors to convert home equity into cash without taking on a mortgage payment or giving up ownership of your home.
If You Owe Little to Nothing on Your Home
If you owe little to nothing on your home, you stand to benefit unusually well from a reverse mortgage – especially if you don’t need the money right now.
For candidates who fit this profile, I recommend structuring the reverse mortgage as a line of credit. The line of credit is fantastic because it essentially turns a portion of your home’s value into a tax-free retirement “account” that will grow and compound over time.
This may sound very similar to a traditional home equity line of credit (HELOC). That’s because it is – to a point. The reverse mortgage offers all the flexibility of a traditional HELOC, but without the risks.
The HECM line of credit is a far better option for seniors for the following reasons:
No Mortgage Payments Required
As long as at least one borrower or non-borrowing spouse is living in the home and paying the property charges, no mortgage payments are required.
The Line of Credit Cannot Be Taken Away
The line of credit cannot be chopped, revoked, or frozen as long as you meet your program obligations.
The HECM Is Non-Recourse
You, your heirs, and your estate are not on the hook if the home isn’t worth enough to settle the entire loan balance. FHA will cover any shortage out of the Mutual Mortgage Insurance Fund.
Even better, the line of credit grows and compounds larger over time based on a guaranteed growth rate. There is no limit on how large the line of credit can grow. Here’s an example.
What This Means for You
Think about what this means for a minute. First of all, the HECM line of credit turns a normally unusable asset – home equity – into something that actually contributes to your financial well-being in retirement. No longer do you have to live on just pensions, Social Security, and retirement assets such as IRAs, 401(k)s, etc.
These are all good things, but the HECM adds home equity to the retirement funding picture as well. When you have more money and more financial options, you’re better equipped to absorb unexpected expenses without having to drain other assets (and maybe incur an income tax bill), borrow on credit cards, or take out high interest loans.
You’re also better equipped to protect and preserve your assets and lifestyle for longer. No senior wants to run out of money, right? The HECM offers an additional retirement funding source that helps alleviate financial pressure on other retirement assets. When used strategically, the HECM line of credit can help ensure your money lasts at least as long as you do.
So, if you’re early in retirement and you fit the profile I’ve detailed here, get a HECM line of credit set up right away. The sooner you get it, the more money you’ll have when you actually need it.
Do you own your home? Have you considered a getting a reverse mortgage? What do you think about using HECM as a line of credit? Does the option of using home equity as a safety net sound appealing? What experience do you have with reverse mortgage? If you have any questions or concerns, please share them below.