Take Out Cash From Your Home Equity

The ability for homeowners to turn the equity in their homes into cash through the utilization of reverse mortgages is the primary selling point of these loans. For retirees who are having trouble making ends meet with the money they have saved and the benefits they receive from Social Security, this can be a saving grace.

Unfortunately, a disappointingly high percentage of older citizens in the United States suffer with financial concerns. In a country where the majority of consumers struggle to accumulate the resources necessary to sustain a comfortable retirement, this is not surprising.

However, the annual personal savings rate has been substantially lower on average for decades, with only a few exceptions. This is despite the fact that it is widely recommended that you save and invest at least 15% of your salary over the course of a 40-year career in order to retire on time.

As a direct consequence of this, approximately 80 percentage of households that contain adults over the age of 65 report having financial difficulties. Because the costs of medical treatment or long-term care can easily outweigh even above-average retirement savings and Social Security benefits, very few people in the United States can truly say they are financially secure.

To our good fortune, investing in a home acts as a form of automatic savings plan.

Simply holding onto a property will inevitably result in the accumulation of equity because you are required to remain current on your monthly mortgage payment in order to remain in your home.

Because of this, if you've been paying down the mortgage on your home for a number of years, you likely have access to cash that can make your retirement portfolio last for a longer period of time. You have the option of drawing down all of those money at once or setting up a series of recurring payments with a reverse mortgage.

For instance, you might receive $200,000 in cash upon the closure of the reverse mortgage, or you may choose to withdraw $20,000 annually over the course of the next ten years in the form of equal monthly payments.

Free From Taxes Income

It is simple to forget the cost of  of people do not do so out of their own personal funds in the same manner that they pay for things like food or rent. However, taxes have the potential to considerably cut into the value of many different kinds of retirement income.

To our good fortune, the Internal Revenue Service (IRS) treats the proceeds from a reverse mortgage in the same manner as they treat the proceeds from a traditional mortgage. To put it another way, the money that is given to you is not considered income and is therefore exempt from taxation.

The money received from a reverse mortgage can be used in several ways.

As a consequence of this, the money you receive from a reverse mortgage goes far further than the money you take out of taxable retirement accounts such as standard 401(k)s and Individual Retirement Plans (IRAs), or even Social Security.

Consider the following scenario: you are a married retiree in Texas who is 65 years old and pays their taxes jointly. Your annual costs total $30,000. You would need to take an annual distribution from your 401(k) of around $33,500 in order to maintain your current standard of living and pay your taxes to the federal government.

Because the revenues from a reverse mortgage are not typically considered to be income, the influence that these funds have on your retirement benefits may typically be kept to a minimum as a result. This benefit comes on top of the fact that it can assist you avoid losing money to taxes.

These typically have income restrictions, and if you make too much in a single year, it can put you in jeopardy of losing them. To continue to qualify for the state's Medicaid program, for instance, a California household consisting of two people must have an annual income that is lower than $24,353.

Keep Yourself at Home.

If you are a retired homeowner who is having trouble making ends meet, selling your property is frequently one of the most effective answers to your difficulties. It not only enables you to turn the equity in your house into cash, but it also gives you the freedom to relocate to a new place.

This is typically to their advantage given the fact that many retirees reside in homes with unused space. For instance, married couples who continue to reside in the same home in which they brought up their children after their children have moved out are likely making payments on rooms that they no longer require.

How can you lower the amount that you pay for housing?

If you decide to sell your current residence, you may be able to considerably lower your monthly housing costs by renting or purchasing a house or apartment that is smaller in size. You also have the option of moving to a region with a lower overall cost of living.

However, not everyone has the choice or ability to sell their possessions. There are some seniors who will not be able to reduce their living expenses by relocating to a new area, and others may choose to remain in their homes for other reasons, such as to be closer to their families or to avoid the stress of moving.

In situations like these, a reverse mortgage would be the best choice to make. They allow you to gain access to the equity in your house without having to sell the property or depart the premises in order to do so.

Provides Protection Against Falling Property Values

Your loan total may reach a point where it is more than the value of the underlying property, which is one of the principal dangers associated with the majority of home equity financing options. This may occur if the value of your property drops or if you fall behind on your debt payments and end up accruing additional interest.

If you or your beneficiaries have to sell your property when it is "underwater" like this, it can be a huge financial hardship to make up for the gap that results from the sale.

Take your home as an example; let's say it's paid off and worth $250,000. You decide to put the profits from the home equity loan you took out for $200,000 that you used to help fund your retirement in bonds.

Almost immediately after that, the real estate market in your area collapses, bringing the value of your property down to $175,000 in the process. If you were to try to sell the property at this point, you would be required to make up the difference of $25,000 that exists between the amount of equity you currently have and the outstanding loan debt.

Thankfully, High-Efficiency Countermeasures (HECMs) provide protection against that risk. They are a form of debt that does not require repayment, in contrast to home equity loans and HELOCs.

This indicates that the only method available to the lender for collecting on the balance is to seize the underlying collateral. They are unable to seek compensation for their losses from your income or the income of your beneficiaries or from any other assets.

Reverse Mortgage Cons

Mortgages in which the borrower pays the lender are known as reverse mortgages. These loans come with a number of significant downsides, which reduce their overall usefulness. The following are the ones that you need to comprehend in order to make a decision that is informed.

Equity Requirements

Before you can use any form of home equity finance, you will need to accumulate a certain level of equity in your property. You won't be able to borrow against the equity in your home if there isn't enough "meat on the bone" to cover your closing costs and still leave you ahead financially.

Unfortunately, the minimum equity requirements for reverse mortgages are significantly higher than those for most other options. Although the particulars are different according on the lender, in general, you need at least fifty percent equity in your primary residence in order to finish one.

In the meantime, the standard eligibility requirement for a home equity loan or home equity line of credit (HELOC) is just 20% of the value of the home. Because of this, reverse mortgages are significantly more difficult to obtain than their conventional equivalents.

Verify that you have sufficient funds before applying for a reverse mortgage.

Not all retirees have lived in their homes for a long enough period of time to have accumulated sufficient equity to qualify for a reverse mortgage. A reverse mortgage may be out of reach for you if, for instance, you refinanced your home over the past several years or experienced major declines in the value of your property.

To determine the amount of equity that you have in your house, take the current market value of your property and deduct the amount that is still owed on your mortgage or any other home equity finance agreements.

Take, for instance, the scenario in which you make a down payment of $30,000 on the purchase of a home that costs $300,000. You would have 10% equity in the home if you purchased it because $30,000 is the fraction of $300,000 that equals 10%.

Expenses Relating to the Closing and Interest

The costs associated with getting a reverse mortgage are typically higher than the costs of getting other types of loans or selling your home's equity. For instance, your closing costs would most certainly be higher if you refinance rather than sell your property or take out a home equity line of credit.

The costs associated with a reverse mortgage are not only more expensive, but they are also more convoluted than the fees associated with a conventional mortgage. Because of the level of complexity involved, prospective borrowers are required to undergo professional counseling before being approved for a loan.

Although the terms may differ from one provider to another, in most cases you will be required to pay certain fees.

Premium for mortgage insurance that is paid up front and represents 2% of the total loan balance

Annual MIP payment that is equal to 0.5 percent of the total outstanding balance of the mortgage

There may be origination fees totaling up to a maximum of $6,000, which cannot exceed the greater of $2,500 or 2% of the first $200,000 plus 1% of the remaining balance.

Costs incurred by a third party, such as an appraisal, a title search, surveys, inspections, recording fees, mortgage taxes, and credit checks, among other things.

Mortgages with interest rates that are greater than those of standard mortgages

Monthly service fees as high as $35 for accounts with monthly altering interest rates, compared to a maximum of $30 for accounts with annually adjusting or fixed interest rates.

You won't have to pay for these costs out of your own pocket, which is a huge relief. You can use the money from your reverse mortgage to pay for the up-front fees, and you can roll the ongoing expenses into your loan debt so that you don't have to worry about paying them until after you move out of the house.

Heirs Will Inherit Less

Your reverse mortgage debt won't become due until the property is sold, you move out of the house, or you pass away, as long as you keep up with the mandatory property taxes, homeowners insurance, and regular maintenance payments.

Despite this, the accounts are not offered at no cost to users. The expense is only postponed, and it is likely that your heirs will bear the majority of the burden. The longer the balance on the account remains unpaid, the more it will eat away at the equity in your property and diminish the amount of money they will inherit.

They are in luck since they won't have to pay anything extra, even if the balance climbs to an amount that is greater than the value of the property itself. On the other hand, if you let your reverse mortgage go unpaid for an excessively long period of time, you might have very little or even no equity left.

Make sure you receive a pricing that is not variable.

Consider the following scenario: you have a home that is completely paid off and is worth $400,000. You then decide to use a reverse mortgage to obtain a lump sum payment equal to $200,000 from your home's equity. The loan has a predetermined interest rate that is set at 7%.

Your home's worth will continue to rise at a rate of 3% per year over the next ten years while the balance on your mortgage will continue to accrue interest. Even if you disregard all of the other ongoing expenditures associated with the reverse mortgage, the equity in your property will continue to decline at a significant rate each year.

Check your calculations on the worth of your home and the reverse mortgage.

The worth of the house, after ten years, would be around $537,567. On the other hand, the value of the reverse mortgage would have shot up to $393,430 if it had been completed. As a direct consequence of this, the most that your heirs could possibly inherit from you is 144,137 dollars.

Watch Out: This Might Nullify Your Eligibility for Other Retirement Benefits

Because many retirement benefits are awarded on the basis of need, it is possible that you will not be eligible for benefits if your income or assets are higher than the levels that have been established. As a consequence of this, obtaining a reverse mortgage could have an effect on your eligibility if you do not adequately plan ahead.

In most cases, the proceeds from a reverse mortgage are not considered to be income; however, the cash that these proceeds generate is most certainly still considered to be an asset. Because of this, if you liquidate your home equity too quickly, you run the risk of accidentally disqualifying yourself from participating in certain programs.

Be sure that you won't jeopardize your eligibility for certain perks by making a mistake.

Most importantly, reverse mortgages can put your eligibility for government programs like Medicaid and Supplemental Security Income (SSI) in jeopardy. Medicaid and SSI are two programs that typically have asset limits, though state Medicaid programs can vary.

Take for instance the scenario in which you are a California resident and receive your health coverage via Medicaid. Even with your Social Security payments, the $150,000 that each of you and your husband have in your 401(k) accounts will be depleted during the next five years due to the costs of your living expenditures.

You are fortunate to have $200,000 in equity in your home, and you have decided that you want to cash it out via a reverse mortgage. However, in 2022, married couples will no longer be eligible for assistance if they have more than $195,000 in countable assets. This amount covers both cash and securities.

As a consequence of this, if you used a reverse mortgage to obtain a lump sum payment of more than $45,000, you would be in violation of Medicaid's asset limits and hence ineligible for benefits.

You are fortunate in that there are a number of additional options for you to get the proceeds of your reverse mortgage.

The tenure plan is an alternative that functions very similarly to an annuity and ensures that you will continue to get the same amount of money every month for as long as you continue to reside in the property. If you live long enough, the sum could end up being greater than the equity in your property.

Term payments: This arrangement, which is very similar to a home equity loan, provides a fixed monthly payment for a set period of time, such as ten years. The term can range from one to thirty years.

Line of credit: Instead of withdrawing funds immediately, you can set up your reverse mortgage as a revolving line of credit and borrow against it when necessary.

Hybrid plans: For maximum flexibility, you can combine the annuity or term payment options with a line of credit. That way, you’ll have a steady income with the ability to borrow more whenever you want.

To protect your eligibility for any other retirement benefits you may have, consider drawing down your funds over time using one of these methods instead of a lump sum. It’s a good idea to consult with a financial advisor to help you determine the best option.

Property Maintenance

Reverse mortgages require that you retain ownership of your home indefinitely. While some seniors are happy to stay in their homes for life, they may struggle to keep up with the required maintenance as they age.

An apartment is usually manageable for a long while, but keeping a house in good shape is often too physically demanding for seniors. For example, few elderly individuals can climb ladders to clean gutters or shovel snow out of their driveways.

Unfortunately, taking out a reverse mortgage raises the stakes further. Failing to maintain your residence properly could violate your terms and cause your outstanding balance to come due immediately.

Can you keep up with upgrading requirements?

That’s exceedingly rare, but seniors who lack the physical attributes necessary to keep their homes in line with health and safety standards could run into trouble.

If you don’t have younger family members in the area who can help maintain your property and lack the capital to pay for help, taking out a reverse mortgage might not be the best idea.

Would it be better to sell and downsize?

Instead, you’d likely be better off selling your home and downsizing to a more easily manageable property, such as a condo with a homeowner’s association that handles all the external maintenance.

Reverse Mortgage Requirements

Though none are especially challenging, reverse mortgages have many eligibility requirements. In addition to being a homeowner and at least 62 years old, you must also meet the following criteria:

Principal residence: You can only execute a reverse mortgage using your primary home. Investment properties aren’t eligible for the loan product.

Significant home equity: Lenders typically want you to have at least 50% home equity to get a reverse mortgage. Others may require you to own the property outright or to pay off any existing mortgage balance with your loan proceeds.

Current on federal debt: If you’re delinquent on any federal debts, such as income taxes or student loans, you won’t be able to qualify for a reverse mortgage.

Sufficient financial stability: To get your reverse mortgage, you must demonstrate that you have the means to afford your property tax, homeowner’s insurance, maintenance, and repair costs.

Property maintenance standards: Your property must be in reasonably good condition to get a reverse mortgage. After ordering an inspection of your home, lenders may require repairs before closing.

Reverse mortgage counseling: Because reverse mortgages are such complex and risky financial transactions, consumers must receive counseling from an approved agency to get a loan.

Notably, reverse mortgages are one of the few financial products that don’t require credit. Since they typically don’t involve taking on any debt obligations, lenders don’t need to worry about your credit score.

Other Considerations

Taking out a reverse mortgage isn’t a decision to make lightly. Not only does it affect your living situation for the rest of your life, but it also impacts the inheritance you’ll be able to leave for your heirs once you pass away.

As a result, you must take the time to do your due diligence. In addition to calculating the financial repercussions, consider the effect of the decision on your lifestyle, happiness, and relationships.

Ask yourself some pointed questions

Would I be happy living in this property forever?

Am I healthy enough to maintain this home indefinitely?

Do my heirs hope to move into this property once I pass away?

Are there any more affordable alternatives available?

How will this arrangement impact my spouse if I pass away first?

In addition to consulting a financial expert, it’s wise to discuss this decision with your beneficiaries and closest relatives, especially if they’re supporting you or you expect them to in the future.

Bottom Line: Should You Get a Reverse Mortgage?

Reverse mortgages are relatively uncommon. In 2020, there were only 43,000 reverse mortgage originations across the United States. For context, there were 869,000 HELOC originations that same year.

In many cases, you’d be better off selling your home, using a different form of home equity financing, or meeting your financial needs in some entirely unrelated way.

If you meet certain specific requirements, a reverse mortgages may be a good idea

You’re happy to stay in your home for the rest of your life

You’re healthy enough to maintain the property or have adequate help

You don’t care about leaving the asset to your heirs

You’ve built a significant amount of home equity

You can afford your taxes, insurance, and maintenance costs

The arrangement won’t impact your other retirement benefits

As always — watch out for the terms