What is a Reverse Mortgage Refinance?
Are you nearing retirement? Maybe you are already retired, but you’re not getting the most out of the equity in your home. If you are on a fixed income or looking to make a significant addition to your finances, a reverse mortgage refinance might be for you*.
Reverse mortgages have become a useful retirement planning tool for many homeowners. If you are 62 years of age or older, you may be eligible for a Home Equity Conversion Mortgage (HECM), also known as a reverse mortgage. A HECM gives you the option to take advantage of the equity you’ve built up in your home over the years you’ve owned it and turn it into money you can use today.
What is a Reverse Mortgage Refi?
A reverse mortgage refinance is a loan insured by the Federal Housing Administration (FHA) and is designed for clients 62+. Unlike a typical mortgage, where an individual makes regular payments to the lender, a reverse mortgage does not require monthly mortgage payments. Instead, the equity in your home is converted to cash which the borrower can receive monthly, or in one lump sum.
The lender charges interest on the amount of equity, which is then added to the borrowed amount. When the last borrower moves out of the home or passes away, the loan becomes due. The loan can simply be paid back by selling the home, and the funds owed go to the lender.
You will never owe more than the value of your home in a reverse mortgage loan, regardless of how much you borrow. If the balance is less than your home’s value at the time of repayment, you or your heirs keep the difference.
Who Would Benefit from a Reverse Mortgage?
A reverse mortgage refinance would be excellent for those who:
- Don’t plan to move
- Can afford the cost of maintaining their home and keep up with property taxes and insurance
- Want to access the equity in their home to supplement their income in retirement
Some people even use a reverse mortgage refinance to eliminate their existing mortgage and improve their monthly cash flow.
Reverse Mortgage Details
- Adjustable or fixed-rate available.
- No monthly mortgage payment required.
- Use the equity in your home as a source of income (with a HECM).
- The amount owed cannot exceed the value of the home.
Benefits of a Reverse Mortgage
- Continue to live in your home and keep the title to your home – you still own the house.
- Use your tax-free proceeds from a HECM for financial expenditures.
- Leave the remaining home equity to heirs once the reverse mortgage is paid off.
Reverse mortgage interest is generally comparable to traditional mortgage rates, but instead of you paying monthly payments to a bank or lender, the bank or lender pays you.
Additional Ways to Plan for Retirement
Each person has a different idea of what retirement looks like for them, so it’s important to set goals that align specifically with your post-career plans. In most cases, it’s safer to assume you will be living off of the money you’re saving now.
Here are a few helpful questions you should ask yourself when setting your retirement goals.
What age do I want to retire?
The average retirement age in the U.S. is 62-years-old, likely because this is the earliest age you can receive Social Security benefits. Nonetheless, some workers find they have enough to retire by age 57, or sooner if they sell a business or inherit money.
Delaying retirement, even by a few years, can make an exponential difference in your savings. If you’re married, you will also need to take into account when your spouse is likely to retire.
How long do I expect to live after retirement?
Although this isn’t the most pleasant conversation to have, it’s crucial to your savings goal that you plan out enough money for the length of your life. Do you, or your partner, have health issues? Will you eventually need long-term care?
The type of care (in-home or assisted living), state, and possible medical needs could potentially drain your savings. It’s impossible to predict every potential need that could occur after you retire, but it’s best to over-prepare than live in debt.
How much monthly income will I need to maintain my current lifestyle?
According to Investopedia, the average monthly (Social Security) benefits for a retired worker in 2018 was $1,413 per month. For some, this may be enough to live on. However, for others, you’ll need to invest time and research into the amount you will need each month after you retire.
How much do you spend on groceries? Bills? Other living expenses? Vacations? If you’re already savvy with your finances, a savings calculator will be a great additional resource. If you’re not really sure where to begin, a financial advisor could be the best route for you to take while you still have time.
Make Your Plan
Recent studies show that only 26% of workers with a retirement plan feel very confident about the amount of money they (and their spouse) have saved for retirement.
If you’re confident in meeting your goals, that’s great! If you aren’t, what are your next steps to becoming financially stable in your late years? You could:
- Contribute to a 401(k), if eligible. These accounts allow you to contribute pre-tax money, which will allow you to invest more
- Open an IRA account. Choose from a Traditional or Roth, depending on your current and future financial goals
- Automate your savings
- Reign in your spending and set strict limits
- Take advantage of the equity in your home
Do you still have questions about what homeownership will look like for you during retirement? Contact a trusted, local Mortgage Advisor today to learn more.