If they own stocks or bonds, they might not want to sell with both markets crashing simultaneously. Or they may be out of options altogether and their home is their only valuable resource left.
That’s when a home equity conversion mortgage comes into play. Most people think of reverse mortgages, as they’re commonly called, as the last-gasp attempt to stay in your house when you’ve run out of money in retirement. But even before they get into financial trouble, some seniors are using these loans as a financial-planning tool, so they can leverage the equity in their homes on their own terms.
If you’re over 62 and have equity in your home, you can use a reverse mortgage to pay off your underlying primary mortgage using the equity built up in the property and then borrow a portion of the remaining equity — either as a monthly payment, lump sum or line of credit.
Federal regulations require credit counseling before you can borrow, in which a loan expert explains the complicated terms. You still should be proactive about knowing your rights and keeping up on any investigations into bad actors in the industry, so you should check in with the Consumer Financial Protection Bureau.
This is how reverse mortgages work: If your house is worth $430,000, which is the average for these loans according to the National Reverse Mortgage Lenders Association, and you have $100,000 remaining on your mortgage, you might have access to about $150,000. (You can run your own numbers with an online calculator.) If you stay in the house the average length of a reverse mortgage contract, which is seven to eight years, and eventually sell for $500,000, you’d walk away with whatever cash is left, depending on fees and taxes.
Many people think they have to give up the title to their home, or that they could lose money if their home goes down in value. But neither is the case.
“You’re not giving up the house,” says Wade Pfau, the author of a book on reverse mortgages. “If you sell and pay off the loan balance, everything left over is yours. If the loan value exceeds the sale price, you’re not on the hook to pay back more.”
There are drawbacks. One is high fees. Closing costs are higher than with a home equity line of credit or a cash-out refinance, plus there are ongoing charges while you keep the loan active. Your interest rate might also be higher than conventional loans.
Another possible risk is that even without having to make a mortgage payment, your financial situation could still be dire. If you can’t keep up with your taxes and insurance, you could go into foreclosure.
“You’re just going to end up in the same place,” says Genevieve Waterman, director of economic security for the National Council on Aging, which publishes a resource guide for seniors on reverse mortgages.
‘Where are you going to live?’
So far in 2022, reverse mortgages are ticking up, with more than 60,000 processed, up from 49,000 the prior fiscal year, according to data from the U.S. Department of Housing and Urban Development compiled by NRMLA. During the Great Recession, these mortgages numbered more than 100,000 a year, as economic conditions worsened.
This may be because seniors who face high inflation and declining investing markets are caught in a bind. If they are having trouble meeting expenses and want to downsize their housing costs, there are few options that are cheaper than their current housing situation.
“Where are you going to live?” asks Lori Trawinski, director of the AARP Public Policy Institute, which also has help available for seniors considering reverse mortgages.
Unless you move in with a relative, wherever you go, there’s still that housing payment, and it’s likely to go up over time unless you stick with a fixed-rate mortgage.
Turning to a home equity loan can be an option, and some lenders allow you to take out up to 80% of your home equity value. But you would still have your primary mortgage payment as well as an extra payment for the home equity line.
If you sell outright, along with the dilemma of where to live, you’d also have to decide how to invest the proceeds prudently so you don’t run out of funds.
Using your house as leverage
When 76-year-old retiree Paul Dandrea faced this decision a few years ago, he ruled out all of these other options and decided to go with a reverse mortgage. His goal was to buy in Arizona before selling his home in North Carolina. So he leveraged a house he knew he was going to end up selling, and shifted the assets into what he expects will be his long-term retirement home.
“It’s a smart planning tool if you happen to get your hands on some equity, knowing you don’t have to pay it back until you’re ready to sell your home,” he says.
This was not a plan he jumped into lightly. Dandrea looked at all the data and worked years ahead to set it all up, qualifying well ahead of time. When he needed the money, it took only five days before he had the cash in hand. He even ran the idea by his financial adviser, Adam Vega.
“He did everything possible to research it and presented it to me and it made sense,“ says Vega, who was initially skeptical of reverse mortgages, but now sees them as valuable for some clients.
Dandrea ended up selling his primary home after a few years and dissolved the reverse mortgage. He ended up thinking it was worth the fees to be able to make financial moves when he wanted.
“It served its purposes, and the big advantage is that I didn’t have monthly payments,” he says.