There are so many incredible financial benefits to owning a home and to this day it is considered to be one of the safest long-term investments you can make. When you buy a home you almost immediately begin building equity, and you can also expect the property to increase in value over time as well. While there are various pros and cons in the debate of renting vs owning, one major benefit of being a homeowner is that if you live in the home long-term and eventually pay it off, you can look forward to living rent and payment-free when you get ready to retire. Home equity is not something to ignore as it is something that you can tap into if you need cash in an emergency situation, or it can even be a part of long-term retirement planning.
Planning for retirement is extremely important – we all work very hard throughout our adult lives and it’s important that the work pays off during our Golden Years and that we can live happily and peacefully knowing our basic needs are taken care of. No matter what your financial plan for retirement entails all that matters is that you get started early and stay consistent with your contributions. There’s research and data out there that shows disappointing and scary statistics about individuals nearing retirement age who have less than $100,000 in savings. Even retirees who have been successful in saving and planning are still concerned about having enough because of the rising cost of medical care combined with increased life expectancy. A major component of wealth and retirement planning that is often forgotten about is home equity. There are various ways to factor in home equity into a retirement plan, but a reverse mortgage is a solid option that is ignored, and many retirees don’t know that it exists as a possibility or don’t understand how to take advantage of it.
What is a Reverse Mortgage?
A reverse mortgage is a type of loan that allows the homeowner to withdraw a portion of their equity without having to repay the loan until they leave the house. One of the most popular types of reverse mortgages available is the Home Equity Conversion Mortgage (HECM), which is insured by the federal government. A reverse mortgage is an opportunity for owners over the age of 62 who own their homes outright or have a considerable amount of equity to tap into. The most common question in regard to a reverse mortgage is why anyone would want to borrow against a home that they worked so hard to pay off – why wouldn’t a retiree want to stay in their home and live there debt free? Instead, seniors facing retirement are more concerned with how they are going to afford their existing lifestyle once they retire and will no longer be cashing a consistent paycheck. A reverse mortgage provides a solution to this issue so that this group of individuals can enjoy a more financially secure retirement as they age.
So, who is eligible to apply for or receive a reverse mortgage? The primary homeowner must be at least 62 years old in order to apply. Additional eligibility criteria includes:
- You must own your home outright or have a single primary lien that you hope to borrow against.
- If there is an existing mortgage, then it must be paid off using the proceeds from the reverse mortgage.
- You must live in the home as your primary residence.
- The borrower must be current on property taxes, homeowner’s insurance and any additional obligations like homeowner’s association dues.
- The borrower will need to take part in a consumer information session that is led by a HUD-approved counselor.
- The property will need to be well-maintained and kept in good working condition.
- The property in question must be a single-family home, a multi-unit property with no more than four units, a manufactured home built after June 1976, a condominium or a townhouse.
If the above requirements are fulfilled, then you will need to work with your lender to work through the process of getting a reverse mortgage. One important note to keep in mind is that even if the property is completely paid off, you may not be able to borrow the full value of the home. The amount you can borrow, which is also known as the principal limit, will vary based on the age of the youngest borrower, current interest rates, the value of the home and the mortgage limit set for a Home Equity Conversion Mortgage. In general, you are likely to receive a higher principal limit if you are older, if your home is worth more and if interest rates are low. Borrowers will also have the opportunity to choose a HECM with a variable or fixed interest rate. With a fixed rate you will receive a single lump sum payment. If you select a reverse mortgage with a variable rate, then you can choose to accept:
- Equal monthly payments
- Equal monthly payments for a pre-determined amount of time that is agreed upon ahead of time
- A combination of a line of credit and fixed monthly payments for as long as you live in the home
- A combination of a line of credit and fixed monthly payments for a pre-determined length of time
The money that is borrowed as a reverse mortgage does not need to be repaid until the borrower passes, moves out or leaves the property for any reason.
If you are interested in applying for a reverse mortgage the application process is similar to that of a traditional home equity loan. If you meet the eligibility requirements then you can shop around for the best deal and work with a lender to assess how much you can borrow.
Can a Reverse Mortgage Allow you to Retire Sooner?
Now that we’re all caught up on what a reverse mortgage is and what the requirements are to qualify, let’s talk about the benefits and how you can use it as a tool to plan for retirement. More often than not, a reverse mortgage is used as a quick fix for cash or a last resort if all else fails. This Hail Mary mentality can be easily avoided by working with a competent and responsible financial advisor who can put an organized plan in place that includes long-term care planning, improving cash flow, mitigating returns risks in the event of a market crash and providing peace of mind for your Golden Years. An important piece of advice to keep in mind is that most people have no idea what they next three or five years of their life will look like, much less the next 20 to 30 years, so it’s impossible to plan with an open-mind and be flexible so that you can handle whatever life throws your way.
Older homeowners are currently finding that they are sitting on record levels of home equity, and even though the upfront costs of a reverse mortgage can be quite high, they are finding it to be a very valuable tool for retirement. The best way to utilize a reverse mortgage as a tool to plan for retirement is to make your monthly payments to pay down your mortgage and gain more equity in your home. When you buy your home, if you are absolutely certain that you will live in this property forever, then you can count on the equity you build as a source of wealth when you retire. If you are unsure whether you will need a bigger or smaller home, if there is a chance that you have to move for work or family, or if there’s another reason that forces you out of your home then you won’t be able to depend on the equity you’ve built as a way to retire sooner.
Many of us dream of retiring early, and even though the average retirement age in the US is 63 years old there are many Americans who are able to retire even earlier with careful planning. By starting to save early, being disciplined and creative you may be able to reach your goal of retirement sooner than expected. At Brazos County Realty we pride ourselves on providing our clients with the information and resources they need to make a well-informed decision regarding real estate in the Bryan College Station area. If purchasing and investing in real estate is part of your retirement plan, then please don’t hesitate to tap into our knowledge and give us the opportunity to help you achieve your financial goals. Our team boasts years of experience working with buyers, sellers and investors locating unique opportunities at favorable prices. Please contact us if you’d like to learn more about our featured properties for sale, or if you would like to discuss your long-term goals for real estate and how this could help you plan for retirement. We look forward to hearing from you soon!