Reverse Mortgages Can Sustain Retirement Accounts During Economic Uncertainty
U.S. and global economic volatility due to the COVID-19 pandemic have many retirees (and those close to retirement) worrying how to survive these turbulent times. Will there be enough to maintain lifestyles and meet retirement spending goals if we experience a long-term bear market?
Most seniors probably are managing Social Security income, pensions, 401K accounts and other retirement and saving accounts. However, many could have hundreds of thousands and even millions of dollars they haven't considered: home equity.
Senior Housing Wealth by the Numbers
The National Reverse Mortgage Lenders Association and Risk Span estimate that Americans 60+ are have over $7.2 trillion worth of home equity. This source of wealth has traditionally been ignored in retirement income planning.
One of the most sensible ways of leveraging home equity in retirement age is through Home Equity Conversion Mortgages (HECM) aka Reverse Mortgages. With increased safeguards and lower costs than in the past, reverse mortgages have become mainstream financial instruments. Simply put, reverse mortgages enable homeowners age 60+ to borrow up to roughly 50 percent of their homes value with flexible repayment terms. Borrowers have the option to make monthly payments or to defer payback until the last remaining borrower leaves the home.
Reverse Mortgage Options
Pay off an existing mortgage: A reverse mortgage can pay off and replace a traditional mortgage loan, reducing the burden of a mandatory monthly payment resulting in immediate savings - especially helpful in today's uncertain times.
Standby Line of Credit: Unlike traditional credit lines, reverse mortgage credit lines are federally insured and cannot be frozen or called due. The unused portion has a guaranteed growth rate of .5 percent over the interest rate, allowing more funds to be borrowed over time. If the property decreases in value, the line of credit remains and continues to grow. This offers an excellent insurance policy against market fluctuation and a tax-free bucket of money that can be used as a buffer in a down market, limiting the need to make portfolio withdrawals, while protecting and preserving retirement accounts. The strategy in turbulent times is to draw from the credit line instead of other assets.
Additional Payout Options: Reverse mortgage proceeds may be accessed as a tenure (lifetime payout), term (equal payments over a fixed period of time), lump sum or a combination of these options. Homeowners may pay back the loan without penalty or sell the home at any time.
Fixed Interest Rates: Interest rates on reverse mortgages are on par with traditional mortgage interest rates. Rates are negotiable and vary from lender to lender.
Adjustable Interest Rates
- Index: This standard rate varies depending on market interest rates. It is not controlled by the lender. The rate charged on your loan can increase or decrease depending on whether the index increases or decreases.
- Margin: The margin is the interest percentage that is added to the index by the lender. This rate is not adjustable, meaning that after loan origination, the margin stays the same throughout the loan term, regardless of what the index may change to. It is negotiable.
The line of credit, tenure and term payouts are only available on the adjustable rate options.
Cost to Establish a Reverse Mortgage
HUD Counseling: To obtain reverse mortgages, borrowers must undergo mandatory counseling with a third-party HECM counselor approved by the U.S. Department of Housing and Urban Development. Typically charged at $125, this counseling addresses the lending process, benefits, drawbacks and eligibility requirements.
Home Appraisal: Appraisals run on average $450 to $550 and can vary depending on the size, age and condition of your home. They are ordered through an independent appraisal management company.
Third-Party Closing Costs: Expect to pay typical mortgage fees for loan recording, credit report and title insurance. These fees could vary and are negotiable. Ask for an itemized fee breakdown.
Mortgage Insurance Premium: There is an initial mortgage insurance premium of 2 percent of the appraised value. The federal government guarantees that borrowers can never owe more on the loan than what the house is worth when the loan is repaid, and all remaining equity belongs to you or your heirs. Over the life of the loan, you'll also pay an annual MIP that equals 0.5 percent of the outstanding mortgage balance.
Loan origination fee: Lenders may change a loan origination fee ranging from $0 to $6,000 depending on your home value. This fee is negotiable and can vary among lenders. Most costs may be financed into the loan.
Reverse mortgage borrowers must pay their property taxes, insurance and maintain the home to comply with loan guidelines. As with any financial product or service, education is paramount.
Steven J. Sless (NMLS: #298581 MLO: #49963) is the national reverse mortgage division manager with PRMI and manager of its Owings Mills branch, which deals exclusively with reverse mortgages. For more information, visit
call 410-814-7575 or follow morewithsless on Facebook, Twitter, LinkedIn and Instagram.