Impact Partners BrandVoice: What You Should Know About Reverse Mortgages

Forbes 1 week ago

Reverse mortgages are probably one of the most misunderstood products on the market today. To better understand how one could fit into your financial plan, let’s start with the basics of a reverse mortgage.

Reverse mortgages are probably one of the most misunderstood products on the market today.
Reverse mortgages are probably one of the most misunderstood products on the market today.

Reverse mortgage 101

Almost all loans are made today under the Home Equity Conversion Mortgage (HECM) program. This program encourages lenders to make loans by providing FHA insurance in case the loan balance exceeds what the house is worth.

To qualify for a reverse mortgage, homeowners must be at least age 62 and be the principal resident. The amount that would be paid to the owners depends on several factors, like the clients’ age, interest rate, value of the house, and the fees that are being charged. The loan balance only needs to be repaid when the surviving borrower dies, sells the house, or moves. This balance will grow with interest until it is repaid; if repayment does not occur for years, the equity will be used up completely.

However, reverse mortgages are non-recourse loans, which means the maximum amount that will ever have to be repaid is the value of the home.

If you have a house with an outstanding loan balance that is more than what the house is worth, whoever receives the house will have the right to purchase the house for the value of the house, not the loan balance. Your heirs are not responsible for the difference, but rather the FHA.

However, the reverse is also true. If the house value exceeds the loan amount, the heirs of the property would see a windfall when the house is sold. It is very important to remember that a reverse mortgage is still a loan. Since this is a loan, there are no income taxes when the house owner received payments, or the loan is repaid.

Three payment options for a reverse mortgage

1. Lump sum

This can be a great strategy for certain situations. I had a client who lost her spouse and was selling her home to live closer to her children. As you can imagine, her income sources were tighter since she lost her spouse’s Social Security income. She wanted to keep some of the equity of her house once she moved to help supplement her income due to this drastic change. After reviewing her specific needs, I advised her to investigate a reverse mortgage to purchase. By taking a lump sum, she basically only had to put down half the cost of the new house, while the lump sum option was used for the other half, allowing her to keep the remaining equity from the sale of her other house.

2. Tenure

This is an option that can be used to generate an income stream guaranteed as long as the owners live in the house. This can be a great strategy when so many people do not have pensions today and can offset withdrawal rates on other investments, allowing the money to be left in other accounts to compound and hedge against inflation risk.

3. Line of credit

This could be a great option to build up a pool of capital to have for several things like emergencies, long-term care, and other strategies like deferring your Social Security income for maximum benefit. This line of credit can also be used to hedge against sequence of withdrawals risk from other investment accounts. For example, if someone wants to retire at age 65, they may think the first thing they should do is start their Social Security benefit. However, this can be the wrong decision, especially if they are married. They would not just be making this decision for them but also for their spouse, if this person is the higher income earner. This line of credit can be pulled from to make up what the SS income would be, allowing the SS to be deferred out to age 70 for maximum benefit. Where else can you get an 8% simple rollup increase to your benefit guaranteed by the U.S. government? Talk about a benefit!

There are only two ways to get money out of your house: either sell it or take a loan against it. The loan must be repaid if the borrowers die, sell, or move. So many people with house equity wait until they have exhausted all other assets. I can understand this because it is such an emotional subject.

What I have learned is there is usually a better way to strategically manage an income plan by using different strategies. So how can you turn a non-liquid asset into money to help you with your overall retirement income plan goals? If you’d like to explore these questions and if a reverse mortgage is right for your retirement income, speak with a seasoned financial professional to get started!

This content was brought to you by Impact PartnersVoice. Investment advisory services offered through Brookstone Capital Management, LLC, a Registered Investment Adviser. Insurance and annuities offered through Travis M Griffin, NC insurance license #0008138568. DT984023-1020

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