Reverse mortgages provide older homeowners with an additional source of cash flow to supplement, and even enhance, their retirement savings. Depending on a borrower’s age, there are several ways that older retirees can maximize their reverse mortgage potential.
A reverse mortgage allows homeowners age 62 and older to convert a portion of their home equity into cash, which can be used however they choose. Because this money is being loaned to the homeowner it is not subject to state or federal income tax.
Reverse mortgages do not require borrowers to make monthly payments, as they would with a traditional “forward” mortgage, however, loan holders are required to remain current on their property taxes and homeowner’s insurance payments. A borrower is not required to pay back the loan until the home is sold or otherwise vacated.
The amount of funds that a borrower is eligible for depends on several factors, including:
- Your age
- Spouse’s age (in the case of couples)
- Interest rates
- Appraised home value or the FHA lending limit of $765,600 — whichever is less
Each of these factors influence what is known as the Principal Limit, which is the maximum lifetime amount a borrower may take out on a reverse mortgage. Taken together, these principal limit factors are important in determining how much of your home equity you can actually access.
Age is especially important because the older the borrower, the more loan proceeds he or she may receive. In certain situations, retirees who choose to get a reverse mortgage at a later age are in a better position to leverage home equity for retirement planning purposes than younger borrowers.
A borrower’s age is critical in determining the amount that can be accessed from the reverse mortgage.
To find out how much in loan proceeds you may qualify for, try using an online reverse mortgage calculator. To get an accurate estimate the only information required is your current age, your home value range and mortgage balance, then you can receive a free, online estimate of how much may be available to you.
There are several different ways to take receive payment from a reverse mortgage:
- A lump sum
- Monthly “Term” payments for a specific amount of time
- Monthly “Tenure” payments for as long as you live in the home
- Line of credit (LOC)
- Or a combination of Term/LOC or Tenure/LOC
Say you want to receive monthly lifetime payments from the reverse mortgage via the tenure option. If your home is worth $200,000 and you are 62 years old with no existing mortgage balance, you may be eligible to receive up to $413.
Now let’s say you wait to get a reverse mortgage until age 72. Assuming the same home value of $200,000 (and no mortgage balance), you could receive monthly payments of up to $660.
On a reverse mortgage line of credit, the 62-year-old borrower could be eligible to receive up to $107,000 compared to $123,000 for the 72-year-old.
Not only can age be the difference between thousands of dollars, but it can also provide other benefits for older borrowers.
Besides the differences in loan payouts at later ages compared to younger ages, borrowers who delay getting a reverse mortgage can benefit in several ways, according to Dan Hultquist, a Certified Reverse Mortgage Professional and author of “Understanding Reverse 2016,” an informational guidebook that provides simplified answers to the most common reverse mortgage questions.
“When potential HECM borrowers delay getting reverse mortgages, there are three things that actually work in their favor,” Hultquist writes.
These include:
- The borrower is getting older, which generally means higher principal limit factors later.
- Home value generally appreciates over time—also another contributor to higher principal limits later in life.
- The existing mortgage balance gets smaller. This generally means higher net principal limits, in other words the total amount of funds a borrower may receive after closing costs and other fees have been factored in.
That’s great for those that can wait to get a reverse mortgage, but are there downsides to waiting? And, what about for those who can’t wait?
Reverse mortgage borrowers may receive larger loan amounts the older they are, however, there are some advantages to getting a reverse mortgage earlier during retirement.
There are two “powerful forces” that can offset the advantages of waiting to get a reverse mortgage, according to Hultquist. They include:
- Missed opportunity for compounding line of credit growth.
- Expected interest rates are projected to be higher in the future.
It is important for retirees to take these factors into account, especially when considering the Line of Credit payment option.
The reverse mortgage line of credit has a unique growth feature, in which the unused reverse mortgage loan balance grows over time at a specified rate.
Recent financial planning research has shown that borrowers who open a line of credit at the beginning of retirement, and then let the credit line grow untouched over time, have more funds available to access in the future. For those that don’t need the cash now, they can choose to wait for larger loan amounts or choose the line of credit option and wait to use a loan amount that is larger in the future.
“The home may appreciate, and waiting will make the homeowner older,” Hultquist writes. “But obtaining a HECM now will allow the available line of credit to grow over a longer period of time.”
Financial planners have found this can be a practical strategy to avoid spending down assets in a retirement portfolio, such as selling stocks at low prices when the market fluctuates. Retirees who delay getting a reverse mortgage, however, might not be to take advantages of this kind of compounding growth.
For some retirees, reverse mortgages may be the perfect solution to shore up existing retirement savings. But while these financial products can provide a variety of benefits, they are not a good fit for everyone.
The best time to get a reverse mortgage depends solely on the borrower’s particular situation and their current cash flow needs.
To find out if a reverse mortgage is right for your retirement planning goals, try using a reverse mortgage calculator or try using our Reverse Mortgage Suitability Test. And if you’d like a professional assistance, contact a financial planner or reverse mortgage specialists today.
