If youre home-rich but cash-poor, heres what to know about reverse mortgages – CNBC
Posted: September 23, 2020 at 7:57 am
Peopleimages | E+ | Getty Images
If you're thinking about a reverse mortgage, be prepared to learn a lot about a complicated financial commitment.
With a reverse mortgage, you can convert part of the equity in your home into cash instead of selling, provided you're at least 62 years old.As long as you continue paying taxes and maintaining the home, you cannot be evicted.
It may sound like the answer to your retirement cash prayers, but complexity and costs are among the factors to consider.
Here's how it works. Instead of a debt that gets lower as you make payments to the bank for a regular mortgage, a reverse mortgage is the exact opposite.
You draw out funds and interest builds up, while the balance grows larger and you hold less equity in your home.
Keep in mind,you must use the funds to first pay off any existing mortgage on your home.
For loans insured by the federal government,the amount you can borrow depends on the age of the youngest borrower, current interest rates and either your home's appraised value or the $765,600 maximum set by the Federal Housing Administration whichever is smaller.
You don't repay the lender until you permanently move out or die.
More from Invest in You: How to get more years for your retirement buck Gen Z needs to know some hard facts about saving for retirement Here's how to keep the well from running dry in retirement
Paymentstoyou vary widelywith different types of reverse mortgages. Possibilities include a one-time payment, monthly payments, or leaving the funds in a line-of-credit that can grow over time if unused or some combination of options.
Most popular is the variable-rate home equity conversion mortgage, according to Wade Pfau, professor of retirement income at the American College, in Bryn Mawr, Pennsylvania. This type of mortgage, aka an HECM, is insured by the Federal Housing Administration and offers several payment options.
Other arrangements are the proprietary reverse mortgage, a private loan backed by a company, and the single-purpose reverse mortgage offered by some state or local government agencies.
Maica | E+ | Getty Images
When you're considering a reverse mortgage, ask yourself if the house will work for you the rest of your life, says Carolyn McClanahan, a physician and certified financial planner who is founder and director of financial planning at Life Planning Partners in Jacksonville, Florida. Scout other possibilities, she advises, such as selling the house so you can use the money for a less-expensive property or to rent.
With a reverse mortgage, you have to be sure you can afford your home forever,McClanahan says.
On the plus side of a reverse mortgage, there are two pros:
On the minus side? Here are the cons:
Applications for reverse mortgages rose 15%in March from the previous month as people turned to the loans to avoid tapping retirement investments in a down market.
And there's another potential reason we'll see more interest in reverse mortgages. Although retirement communities and assisted living facilities have become more common in recent decades, the current Covid-19 pandemic may make large groups of older people living together in one place look like not such a good idea after all, McClanahan says.
This new dynamic could mean that more people will try to age in place instead of selling and moving.
Having more equity built up in the home than in savings is a common reason for turning to a reverse mortgage.
In other words, some people are "home-rich and cash-poor," Pfau said. "They might not have a lot of savings."
Several factors should be in place for a reverse mortgage to work.
[For] an older person who has a home that is aging-friendly in a community that's also aging-friendly, it's probably an OK idea," McClanahan said.
A good strategy could be taking some of the initial money and putting it into modifications to make the home adaptable for someone as they age.
Someone who's financially responsible could benefit. "Don't use [a reverse mortgage] because you want a bunch of money to buy a boat," Pfau said. "If someone can't deal with having the cash, they might be better having their home equity tied up and not available."
A reverse mortgage needs to be a family discussion. "Make sure the children understand," McClanahan said. "We have a huge problem, in that people don't talk over their finances with their children until they are in trouble."
Some families might be able to avoid actually using a reverse mortgage. A client of McClanahan's created his own version, in which he paid his father to help with his living expenses. The son inherited the house when the father died.
Since 2015, people who want a reverse mortgage must undergo a financial assessment to demonstrate they can maintain the home and keep up with property taxes and other costs associated with ownership.
You generally have up to a year after moving out to either sell or come up with the repayment, Pfau says. The category of non-borrowing spouse, created in 2015, means the remaining spouse can remain in the house.
The home must be your primary residence, and you can't be delinquent on any federal debt.
You have to participate incounselingwith a HUD-approved counselor who specializes in home equity conversion mortgages.Counseling is a good idea, McClanahansays. "When people are doing these reverse mortgages, they need the money so much they discount the bad things that could happen," she said.
SIGN UP: Money 101 is an 8-week learning course to financial freedom, delivered weekly to your inbox.
CHECK OUT:My side hustles bring in $5,000 a month: Here's my best advice for getting startedviaGrow with Acorns+CNBC.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.
Link:
If youre home-rich but cash-poor, heres what to know about reverse mortgages - CNBC
- Ask Larry: Will Changes In The Full Retirement Age Reduce My Social Security Benefit At 70? - Forbes - December 22nd, 2020
- 5 Unexpected Sources of Retirement Income -- All Related to Your Home - Motley Fool - December 22nd, 2020
- Considering retirement? Here's why you need to talk about it. A lot. - Minneapolis Star Tribune - December 22nd, 2020
- 3 Moves to Make Right Now if You Want to Retire Early - The Motley Fool - December 22nd, 2020
- Dont Miss These CARES Act Retirement Benefits - Forbes - December 22nd, 2020
- Supreme Court Justice Stephen Breyer, 82, says he will retire 'eventually': 'Hard to know exactly when' - Fox News - December 22nd, 2020
- Don't forget to check your retirement plan. Here are moves to make before the year is out - CNBC - December 22nd, 2020
- Its Time to Change How We Talk about Retirement, Starting with the Word Itself - Kiplinger's Personal Finance - December 22nd, 2020
- LeBron on course to join legends with jerseys retired by multiple teams - NBA.com - December 22nd, 2020
- I'm retired and won't live to see my mortgage paid off. Should I refinance to lower my monthly payment? - MarketWatch - December 22nd, 2020
- Scarborough superintendent plans to retire at the end of June - pressherald.com - December 22nd, 2020
- Katie Compton winding down storied career, will retire in 2022 - Cyclingnews.com - December 22nd, 2020
- How This Couple Retired At 55 With Just $200,000 In Their Roth IRA Account - Yahoo Finance - December 22nd, 2020
- Retired UW computer science professor embroiled in Twitter spat over AI ethics and cancel culture - GeekWire - December 22nd, 2020
- There Are 5 Types of Retirement Savers, New Research Says. Which One Are You? - Barron's - December 16th, 2020
- IRA Guru Ed Slott On Taxes, Retirement & Roth IRAs - Forbes - December 16th, 2020
- Soothing the Retirement Fears of Middle-Class Millionaires - ThinkAdvisor - December 16th, 2020
- Center for Retirement Research: Public pension plans should avoid investing based on social and environmental movements - Yankee Institute - December 16th, 2020
- Tesla Fever: Understanding Index Funds And How They May Hurt Your Retirement - Forbes - December 16th, 2020
- Grand Forks School Board weighs budget reduction, early retirement concerns - Grand Forks Herald - December 16th, 2020
- Andy King to Retire From Arrow Electronics, Inc. - Business Wire - December 16th, 2020
- Top Ford labor negotiator Gary Johnson to retire after 34 years - Detroit Free Press - December 16th, 2020
- Northam to spend $100 million to reduce teacher retirement liabilities - Richmond.com - December 16th, 2020
- Beware these 15 worst states for taxes on your retirement - Yahoo Finance - December 16th, 2020
- 4 pieces of advice to help you retire comfortably, according to people who have done it - Business Insider - December 16th, 2020
- Common Mistakes That Could Derail Your Retirement and How to Avoid Them - Barron's - December 16th, 2020
- Can You Retire a Millionaire With Index Funds? - The Motley Fool - December 16th, 2020
- A Happier Retirement Could Be Yours if You Do These Things - Journal Gazette and Times-Courier - December 16th, 2020
- Report: This Is How Much It Costs to Retire Happy - The Motley Fool - November 27th, 2020
- Retirement reform likely slips to 2021 as Washington finalizes end-of-year spending - Yahoo Finance - November 27th, 2020
- Man fatally shot by relative in FishHawk Ranch home could be retired Marine officer - Tampa Bay Times - November 27th, 2020
- The 10 Best Places to Retire in America - Money - November 27th, 2020
- Pedro Hernandez, retired justice of the peace, dies - Billings Gazette - November 27th, 2020
- Cover Your Biggest Retirement Expense With $300 Monthly in This ETF - Waco Tribune-Herald - October 19th, 2020
- I want to retire next year, but I have $25,000 in credit card debt and a major monthly mortgage payment I also live with my three kids and ex -... - October 19th, 2020
- With interest rates near record lows, retirement may have to wait - Quartz - October 19th, 2020
- 60% of Medicare enrollees worry about health care costs. Here's the best way to pay for them in retirement - USA TODAY - October 19th, 2020
- These are the 5 best places to retire in America - CNBC - October 19th, 2020
- Forget the Rent, Collect the Yield: Why Investors Looking to Retire Early Should Consider REITs - Barron's - October 19th, 2020
- 4 good ways to go broke in retirement - Fox Business - October 19th, 2020
- Americans Are Facing a $3.83 Trillion Retirement Shortfall. Here's What to Do About It - North Platte Telegraph - October 19th, 2020
- Will There Be an End-of-Year Retirement Exodus? - GovExec.com - October 19th, 2020
- How much you need to invest every month to retire with $1 million to $3 million, broken down by age - CNBC - October 19th, 2020
- South Africas unusual electrical plugs, sockets to be retired - Quartz Africa - October 19th, 2020
- A $5,500 withdrawal from your 401(k) could cost you $30,000 - USA TODAY - October 19th, 2020
- 'Blazing the pathway': Retired teacher could become Kansas' first transgender lawmaker - NBC News - October 19th, 2020
- 5 ways HR can help millennials be smarter than their parents about retirement - Employee Benefit News - October 19th, 2020
- Siouxland veterans and service men and women honor retired flags - KTIV - October 19th, 2020
- Im 63, my husband is 70, well have $90,000 a year in retirement how can we claim our Social Security benefits? - MarketWatch - October 19th, 2020
- Retirement investors: Why it's time to stop using the 4% rule - Fox Business - September 30th, 2020
- Regs on retirement-payment withholding updated - Accounting Today - September 30th, 2020
- Empower to buy Fifth Third's $6 billion retirement business - InvestmentNews - September 30th, 2020
- Retirement Savers: 4 Easy Investing Strategies to Implement Now - SCNow - September 30th, 2020
- Need another income stream? Here are 5 reasons to invest in dividend-paying stocks for retirement. - USA TODAY - September 30th, 2020
- 8 Ways to Save for Retirement as a Freelancer - Entrepreneur - September 30th, 2020
- If you're saving for retirement and are in your 50s, it may be time to reassess your plan - CNBC - September 30th, 2020
- This lesser-known retirement savings tool is loaded with tax benefits - Fox Business - September 30th, 2020
- Op-ed: The pandemic has forced firms to offer early retirement plans. Heres what to consider before you decide to pack it in - CNBC - September 30th, 2020
- Even Seniors Who Are Good Savers Stand to Fall Short in Retirement, Report Concludes - Barron's - September 30th, 2020
- Women's Health Care Costs in Retirement Projected to be $200000 More than Men's - Business Wire - September 30th, 2020
- Trinseo Announces the Retirement of Stephen M. Zide and Christopher D. Pappas from Its Board of Directors - Business Wire - September 30th, 2020
- 5 Reasons to Invest in Dividend-Paying Stocks for Retirement - The Motley Fool - September 30th, 2020
- Gardner Fire Chief Richard Ares honored on the eve of his retirement as U.S. Rep. Lori Trahan officially announces $240K grant for his department -... - September 30th, 2020
- Here's what your monthly budget will look like if you retire with $2 million - CNBC - September 30th, 2020
- Parmer to retire as Baptist CEO after more than 30 years - Beaumont Enterprise - September 30th, 2020
- 3 Pitfalls of Only Using a 401(k) for Retirement - The Motley Fool - September 30th, 2020
- Whats your takeoff point? The moment youve saved enough for retirement - The Dallas Morning News - September 30th, 2020
- Your retirement probably won't be anything like your parents'...and that's not good news - MarketWatch - September 23rd, 2020
- This study finds that those who retired early lost brain power - MarketWatch - September 23rd, 2020
- With remote work flexibility, some people opt to relocate ahead of their retirement - CNBC - September 23rd, 2020
- My grandma's secret to a comfortable retirement for the past 22 years - Business Insider - September 23rd, 2020
- Most Americans are behind on their retirement savingshere are some tips to catch up - CNBC - September 23rd, 2020
- Retirement is coming, but it won't be smooth sailing - WATN - Local 24 - September 23rd, 2020
- Here's how to take the mystery out of picking the best retirement savings plan for you - CNBC - September 23rd, 2020
- CalSavers will help people save for retirement. What to know - Los Angeles Times - September 23rd, 2020
- College-Based Retirement Communities Have Been Upended by Covid. Are They Still Worth It? - Barron's - September 23rd, 2020
- 3 things to do immediately if you have no retirement savings - Fox Business - September 23rd, 2020
- What NOT to do with your retirement savings in a crisis - MarketWatch - September 23rd, 2020
- Fortis Inc. Announces Retirement of President and CEO Barry Perry and Appointment of David Hutchens as Successor Effective January 1, 2021 -... - September 23rd, 2020
- National Institutes of Health staffer to 'retire' after being outed as author of online attacks against Dr. Anthony Fauci - USA TODAY - September 23rd, 2020