We have long been advocates of the reverse mortgage, an underutilized tool for seniors in need of additional retirement income.
Baby boomers as a group are currently between the ages of 58 and 76 years old. They tend to have lower savings rates than their parents, fewer pension and retirement plans, have experienced many years of lower interest rates and are facing considerably longer life expectancies.
Reverse mortgages are available to those 62 and older. No repayments are due until the last of the borrowers dies or the home is sold. Heirs have up to twelve months to sell the home, refinance the home or buy it themselves. You can never owe more than the house is worth so if the property is upside down the heirs can simply walk away. On the other hand, if the equity in the home exceeds the loan amount, the heirs keep the excess proceeds.
Reverse mortgage loans are generally tax-free for up to 70% of the equity. While there are no loan payments, the homeowner remains responsible for taxes, insurance and upkeep on the home. Loans may be taken as (1) a lump sum, (2) a line of credit; or (3) a stream of income.
Oddly enough, there may be some benefit to taking out a reverse mortgage closer to the age of 62. This allows the use of a relatively small portion of the reverse mortgage loan to fund life and long-term care insurance to both (a) protect the client’s assets from the cost of long-term care, and (b) to replace the money taken out of the home with the tax-free proceeds of life insurance upon death. Those life insurance proceeds may also be used to pay off the reverse mortgage and keep the home.
For those looking for retirement alternatives, a reverse mortgage may allow for the purchase of a second home and the adoption of a “snowbird” lifestyle or it may allow for the purchase of an income-producing investment property. It may also be used to help adult children in need as an advance on their inheritance.